CANDID in a COVID Environment

As a born optimist and thinking like a proton that is always positive, I’m of the opinion that a cyclical recovery should lead to improved investor sentiment

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Expectations are that the global growth will witness a moderate rebound in the current year.

Ifthikar Bashir

20/20 is a term used to express normal (visual) activity and the current year 2020 could likely be a year of consolidation as the economy and earnings catch up with the markets and transition as the broader market starts participating. Over the past couple of years, market participants have undergone significant pain. We have witnessed polarisation in the market due to a narrow rally limited to a handful of large cap stocks while broader market has been an under performer. Major reason for this has been a sharp slowdown in the economy mainly due to the stress in sectors like Banking, NBFC, Real Estate and Liquidity issues post Demonitisation and implementation of GST, RERA etc, thereby impacting small businesses and unorganised sector. We need to understand the fact that credit is like the life blood of any economy. A streamlined credit cycle with a smoothly functioning banking and NBFC sector is imperative for a high- growth economy such as India.

It has been more than a year since the default by a large financial institution took place, leading to tightening of credit in the country. This has been followed by issues cropping up in a few other names in the banking/NBFC sector. In response, banks had tightened their credit evaluation standards, even as the system liquidity was/is in surplus. With the result, credit growth has witnessed a sharp deceleration. There is risk aversion in the system and banks just don’t want to lend and are content parking money with RBI’s reverse repo window. It’s a challenging situation for a large number of NBFC’s and RE developers etc as they are not able to access financing and the few that are able to, face higher spreads. This scenario is bound to change for better as the economy in general treads on the path to recovery. In fact, Indian economy has likely bottomed out and should see a gradual recovery going forward. Corporate earnings growth in India is likely to pick up in line with improvement in the economy. Sectors like Auto, Banks and Pharma etc which have seen a cyclical downturn could see a recovery.

As a born optimist and thinking like a proton that is always positive, I’m of the opinion that a cyclical recovery should lead to improved investor sentiment. Market is also factoring this in, as is evident from headline indices reaching all-time highs. Global risk-on sentiment should also continue, driven by high global liquidity.

Covid -19 or Coronavirus threat impacting major economic powers like China and now South Korea, Japan etc can pose a near-term risk to markets globally but hope this menace is controlled sooner than later. Further more, with phase one of US-China trade deal done, temperatures are likely to cool down. While this is not the last time two of these global powers will have tussle, at least a truce is in sight in the near term. However, the recent US-Iran tension is another key emerging risk, which has the potential to majorly impact global and Indian macro. Last but not the least, US elections are also likely to have an impact on the financial markets.

Expectations are that the global growth will witness a moderate rebound in the current year. The uptick is expected on the back of a cyclical rebound in global manufacturing, easier monetary policy conditions creating easier financial conditions and easing of global trade tensions. With regard to Equity market and considering current valuations, risk-reward is fairly balanced and returns over a one year plus time frame could be in the high single digits. However, market can offer reasonable returns to long term investors as the economy recovers. Any correction in the market should be bought into while maintaining a balanced asset allocation. There are still pockets of value in the market. Due to lack of economic growth, quality has outperformed. Expensive stocks have become more expensive leading to a divergence in the market. Mid/small cap earnings had got downgraded, however, as the economy recovers, earnings growth of companies falling in these categories should also pick up as they have a higher lineage to the domestic economy. Risk-on sentiment globally should also lead to continuing FPI flows.

For individual retail investors, it’s high time to focus on asset allocation between all products using goal based investment approach and continue to keep investing in a systematic way in the form of SIP/STP’s to build wealth in the long term.

For individual retail investors, it’s high time to focus on asset allocation between all products using goal based investment approach and continue to keep investing in a systematic way in the form of SIP/STP’s to build wealth in the long term. Market fluctuations and near term negative returns have always remained temporary. With time, they do get adjusted in one’s portfolio returns and eventually result in a good investment experience with even one bull market. Historically, it has been observed that such a rally occurs once in three years. Riding the ups and downs by staying invested is the key to fulfilling your long term financial goals.

In simpler terms, while large caps should continue to do well, mid/small-caps should catch up and their relative underperformance can reverse and transition from a narrow rally to broader market participation should be on cards. So, let’s keep calm and be significant.

  • Ifthikar Bashir is a freelance Financial Advisor

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