In past 50 days of lockdown, I had a chance of interacting with
numerous professionals, investors and businesspersons. The general environment
is that of anxiety, fear and pessimism. The promise of a meaningful economic
stimulus by the prime minister seems to have rekindled some hopes. Though greed
usually accompanies hopes, as of this morning, the fear still continues to be
the dominating factor in influencing the investment decisions.
In my view, the following three are the primary sources of
rising hopes:
(a) The prospects of total
collapse in economic growth and consequent high stress in the financial system
is prompting RBI for an aggressive monetary easing. Easing inflation and
government’s resolve to bring back the economy on growth path is also helping
the sentiments.
(b) There is abundant
liquidity in the financial system. As of 6 May 2020, banks had deposited over
Rs8.6trn in RBI's reverse repo window @3.75%. The banks have been reluctant to
lend for quite some time now. People are hoping that the government may assure
banks on credit losses through some sort of guarantee and motivate them to
restart the lending.
(c) The impact of COVID-19
is receding as the most developed countries are reporting flattening of curve.
There are reports of an accelerated approval for vaccine to treat the
infection.
However, unlike August 2019, when the corporate tax rate
restructuring was announced, there appears no urgency amongst investors and
businesspersons to catch the first flight, as the fear still is continues to be
the dominating sentiment.
The fear is stemming primarily from the structural weaknesses in
the economy, anxiety about the future course of socio-economic life, health
concerns and likely redundancies of businesses and people in post lockdown
world.
From stock market perspective, it is pertinent to note that FY21
earnings estimates have been drastically cut to almost 0% growth from 24-28%
growth projected a few months earlier.
The downgrade to upgrade ratio of credit rating of Indian
corporates has touched its nadir in the current quarter, highlighting the
deteriorating solvency and liquidity profiles of Indian businesses.
The stimulus package, the details of which would be known fully
only by Friday evening, notwithstanding its size and shape, is likely to
support businesses and economic over a period of time. Many MSME or even larger
businesses may not survive till that time.
Under these circumstances, I continue to remain hopeful that we
shall get a better entry point in Indian equities during summer of 2020. Till
then I shall savor the cash and watch the markets carefully.
I shall keep reminding myself the most inspiring tag line I saw
behind a truck: Jinhe jaldi thi woh chale gaye(Those who were in hurry,
have passed away.)
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