Equity Market Recap
Domestic equity markets extended their rally in July, 2020, despite persisting concerns over the COVID-19 pandemic as market participants remained optimistic that a coronavirus vaccine would be developed. Better-than-expected corporate earnings for the quarter ended June, 2020, also added to the gains.
The fact that domestic equity markets continued to gain momentum reflects confidence among investors that the short-term tremors caused by the COVID-19 pandemic will be overcome and optimism that a long-term boom in the domestic economy could begin in the near future. Investors' behaviour also reflects the stock market’s tendency to look forward and past current events, which has helped to drive its recent recovery. A rebound in the domestic economy might not come about as easily because some existing structural issues have somewhat worsened due to the pandemic. These issues need to be addressed after the pandemic to foster a sustainable recovery. A report from IHS Markit indicates that the Indian economy is likely to rebound in the second half of 2020, as the impact of the pandemic recedes, and is projected to grow by 6.7% in the next fiscal year. Accordingly, investors will continue to monitor India’s economic health and improvement by closely tracking its indicators.
The global economy is going through a grave health crisis and a vaccine is the only solution. Until an effective vaccine becomes available, the road ahead will be bumpy, and countries may continue to shift their response back and forth between business as usual and lockdown as usual. Thus, looking forward, market performance will be dictated by how quickly the pandemic can be contained. Until then, the recovery is expected to be slow, steady and gradual.
Newsflow and Market Performance
Indian equities continued their upward momentum in July, with markets rebounding by 46% from their March lows to only 10% below their year-to-date all-time peak in mid January. Markets continue to move higher despite the relentless increase in daily new COVID cases and sharp earnings downgrades.
We are still seeing a rising trend in the number of COVID cases, although the fatality rate remains low. There are signs of reflation in the economy – pent up demand is evident—although it remains to be seen if this will be sustainable.
India’s Rural economy is a bright spot, with a normal monsoon and Kharif sowing higher year-over-year. Global macro-economic factors, such as low oil prices and stable currencies also continue to be in India’s favour.
Equity valuations are reasonable, with India’s Nifty 50 stock index trailing its price/book ratio about 13% below its long-term average.
Mid- and small-cap stocks are trading at relatively attractive valuations. Low interest rates and high liquidity can justify higher equity valuations going forward.
Equity markets are expected to remain volatile due to a resurgence of the coronavirus. However, accommodative fiscal and monetary policy and high liquidity should provide some support to stocks.
In the current environment, instead of a short term 1-year view, we feel it best to take a 3-year view as the economy and corporate earnings will likely have normalize within that timeframe.