April 2020 Was a Trailer; Movie Still Months Away
If March 2020 was one of the worst months ever witnessed by investors, then April 2020 was one of the perfect ones. In fact, the performance of April was encouraging because it gave us a sneak preview or a trailer of what a V-shaped recovery may look like. There was a historic jump in benchmark indices despite FPIs selling in the markets to the tune of Rs 6,883 crore, followed by a massive selling to the tune of USD 8.5 billion or Rs 66,000 crore in March.
Heading into the month of May, market participants will be cautious on account of a ‘weakness factor’ gathering steam. Investors, having seen the April preview, are not convinced that the complete movie is ready for any short-term release. Do note that May will also be characterised by steep market correction as had been witnessed in 1992, 2004 and 2006 when the benchmark indices fell by 25 per cent, 17.4 per cent and 14 per cent, respectively. Hence, caution continues to be the watchword in May too.
With lockdowns easing out, the economic machinery is beginning to turn again. It will be a while before the engines can reach their full capacity. Nonetheless, these indications, from a broader point of view, are positive steps and building hope. Also, a lot of effort is going on worldwide in the research and development of a vaccine to tackle the spread of the virus pandemic. It’s just a matter of time before the solution is found.
Speaking of Indian economy, if we consider the GDP size to be USD 3,000 billion and assuming that the economy is functional at 50 per cent capacity, it implies that there is a loss of USD 125 billion per month. For a 45-day lockdown period we are staring at approximately a loss of USD 190 billion, plus the cost until the economy can function at full capacity. Numerically, though the situation appears scary, I am sure the monetary policies plus the expected fiscal stimulus and investments from abroad will cover up a good chunk of this shortfall.
Talking about liquidity, we have discussed at length in our cover story how the recent market correction was triggered by liquidity problems in global markets that led to covering for margin calls in equity markets by FPIs. The cover story highlights the influence of FPIs in the Indian markets and explains whether FPI money acts as a double-edged sword. Since currently the markets are in a risk-off mode, the pharmaceutical sector is the only one that remains in the limelight. Refer to our special story on this sector, including our top two recommendations from the same.
It is often seen that investors overlook a particularly important metric – beta value – while making portfolio decisions. Our special story on beta values emphasises the fact that it is relatively easy to beat the markets if beta values are considered while constructing portfolios. Investors have to understand that the recent wave of peaks and troughs are not anomalies or mistakes; they are unavoidable features of the markets. These actually provide fantastic opportunities to investors as well.
We continue to believe recovery will happen earlier than it is being talked about. Do keep a close eye on what is happening overseas as developed markets are expected to restart faster and that may hasten the flow of FPI money into our country. Stay put, stay safe and continue the slow staggered approach of investing. It is just a matter of time before all will be well!
RAJESH V PADODE
Managing Director & Editor