While the shutdown of socio-economic activity prompted by spread
of coronavirus (COVID-19) is dominating the headlines, there are few more
important things that may be impacted larger volatility in markets and decline
in asset values.
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1. Foreign investors have been net sellers in Indian equities in 5 out 6 years during 2015-2020. In the current year 2020, they have sold net Rs484bn in Indian equities. The FPI selling is certainly not COVID-19 driven. They seem worried about failure in growth acceleration, earnings drought, policy unpredictability, INR depreciation (or USD appreciation), and shrinking yield differential, amongst other things.
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2. The corporate earnings growth has been anemic for past one decade. In past 6years, the Nifty earnings have growth at less than 5% CAGR. The visibility of earnings growth for next year has also diminished with recent events.
3. Multiple instances of
willful defaults, frauds and regulators' apathy to investors have caused huge
losses to the unsuspecting investors. The credit rating agencies and auditors
have repeatedly failed in performing due diligence in performance of their
duties. The mutual fund managements and fund managers have miserably failed in
performance of their fiduciary duties by (a) breaching prudent exposure limits
to single company, group, sector etc.; (b) subscribing to suspect quality debt;
(c) failing in timely realization of collateral; and (d) failing in disclosing
the true nature of the risk in various fund portfolios. Massive losses to the
investors due to write down in debt securities of IL&FS, Essel Group,
Vodafone, Yes Bank, etc is one major reason for investors' mistrust and
disenchantment from financial markets.
4. The unusual weather in
past 6 weeks has impacted the Rabi cop at many places in north India. This
shall definitely impact the overall rural income; something the market was
relying upon for economic recovery.
5. The collateral damage
from the business disruption due to COVID-19 may impact many micro businesses
materially. One quarter of poor activity may be sufficient for these micro
businesses to slip into a debt spiral. The collective impact of damage to these
businesses shall be visible in balance sheets of financial institutions and
P&L of consumer product manufacturers in near term. We have not seen the
regulators and the government rising to the occasion and proactively providing
comfort to the stressed entrepreneurs.
In short, there are more worries for Indian markets besides
COVID-19. Expecting sharp sustainable bounce in near term may not be an
appropriate thing to do at this point in time.
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