Indian equities to consolidate in range post a sharp run-up; Stay Stock specific

Covid-19 has been an unprecedented event which has caused dislocations across the global economies. The pandemic driven lockdowns across the globe (as well as India) have led to a sharp decline in economic activities. IMF as well as key rating agencies have downgraded the global GDP estimates on account of Covid-19 and further downgrade is expected as the tail of the pandemic lengthens.

The IMF has pegged the cumulative loss to global GDP over 2020 and 2021 from the pandemic crisis at around $9 trillion, which is greater than the economies of Japan and Germany combined. To put into perspective, GDP pain is as grave as the 2009 financial crisis: 2009 witnessed global GDP decline of 2.5%, while 2020 is likely to witness global GDP decline of 3%, as per IMF. For India, most rating agencies now expected a GDP decline in 2020, while RBI (without mentioning a number, citing uncertainty), has clearly indicated that GDP growth will be in negative range for this year.

Given the economic dislocation, Governments and central banks around the world have unleashed unprecedented fiscal and monetary stimulus and other support for economies. As at June 2020, they have provided a total of US$ 7 trillion in quantitative easing, US$ 6 trillion of fiscal policy, and US$ 4 trillion in loan loss guarantees. Stimulus and Quantitative easing (QE), bodes well for overall liquidity in the financial markets, financial asset prices and consequent equities. With daily global cases peak out in early May, 2020 coupled with QE effect, global markets have witnessed a sharp rally.

Indian markets have also staged impressive returns from March 2020 lows with the Nifty up ~40% primarily tracking upbeat global markets. We understand that with increasing recovery rate on Covid-19 infection in India and incremental news over global medical fraternity nearing developing a medicine to counter Covid-19, the market’s momentum has been buoyant. The economic impact of Covid-19, however, is expected to be a bit more prolonged with intermediate hit on corporate as well as individual earnings. Therefore, we turn a tad cautious on markets at the prevailing level and opine that broader indices would consolidate in a narrow range taking cues from progressive economic data points post Covid-19 led disruption, crude price movement, FII flows and geo-political newsflows.

Extended lockdown, muted economic activity due to Covid-19 led to a sharp downward revision in Nifty earnings, going forward. Given cautious management commentary, the demand recovery is expected to be gradual or “U” shaped in nature vs. earlier anticipation of “V” shaped recovery. Hence, our FY20E/FY21E/FY22E EPS estimates for Nifty are revised downward by 22%/27%/ 20%, respectively. We, however, expect stock specific action to continue chiefly linked to the rural economy (given low incidence of Covid-19), resilient sectors like IT, pharma and private banks as well as beneficiaries of China dependence shift. The focus as an investor in such uncertainty should be on buying businesses, which have sustainable competitive advantage (moat), have limited leverage (strong B/S) and are capital efficient in nature.

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