Markets may turn wary as GDP print to shift focus to tough economic reality3 min read . Updated: 30 Aug 2020, 04:02 PM IST
The first-quarter’s GDP figure could be a washout, with analysts forecasting GDP growth to contract by a whopping 19% on average
Stock markets will be on their toes this week as a flurry of macro-economic data is expected to show just how severely covid-19 has shattered the economy. The first-quarter’s GDP figure could be a washout, with analysts forecasting GDP growth to contract by a whopping 19% on average.
But considering that corporates have seen a better-than-expected Q1, and that the agri-sector showed surprising resilience during the lockdown, investors are hopeful the final GDP print may not be as bad.
Further, both the manufacturing and services PMI figures that will be unveiled early in September will raise hopes that manufacturing and services are indeed picking up.
But there is no denying that FY20 is going to be the worst year for the economy. Economists and analysts may lower their GDP estimates if final figures turn out much worse than anticipated. The full-year GDP is expected to contract by around 5-6%, though a further contraction cannot be ruled out.
Further, the much-needed push from the government for the Indian economy is proving to be sluggish. The government’s precarious financial position due to lower tax collections shows that pretty much very little can be done to shore up the Indian economy. Some of its effect could be seen in the capital goods sector.
But stock markets are on another road altogether looking ahead than at the rear-view mirror. On the back of a notable pick-up in lending, the Nifty Bank index has been a star performer last week, gaining about 10% against the Nifty 50’s 2.5% rise. The one-time restructuring of bad loans will give banks sufficient time to address the hole in the balance caused by covid-19.
Investors are also re-evaluating some banking PSU stocks such as SBI which are quoting at steep discounts to intrinsic value. A recent Goldman Sachs report upgraded the stock, noting that the bank could further re-rate to 0.7 times book value.
Some other lenders are seeing stress in the moratorium book such as LIC Housing Finance. But the company is experiencing a pick-up in disbursals, while fresh bad loans are in check.
Meanwhile, for telecoms investors, great amounts of data consumption are not showing up in higher average per user revenues. Competition is still under-pricing data usage to capture market share, and further deepen penetration of data services.
Some FMCG companies continue to show decent growth. P&G Hygiene’s Q1 gross margin expanded 430 basis points, which is good.
However, for cement companies, after the initial jump in cement prices due to pent-up rural demand, cement prices are now beginning to taper down.
Nevertheless, sectors such as diagnostics have got a bump-up on covid-19 testing. But, given that preventive check-ups will be impacted, the sector's high stock prices could be at risk.
Coming to the broader markets, the rise is alarming from one perspective: it is widening the gap between the market and the economy. Stocks are now far removed from the pain that is roiling the economy.
The Nifty 50’s trailing valuations have shot past its highest levels lately. Foreign investors have resumed their purchases of Indian equities in a huge way. They seem to be driven by the need to diversify some of their holdings away from the dollar. This has also led to the strengthening of the rupee. A current account surplus due to lower oil import bill is adding to the rupee’s appreciation.
This means that we could still see some more flows coming into the market from overseas. The only hitch is that the number of new covid-19 cases is swelling by the day. India crossed the three-million mark in cases, posing a risk to the markets.
Domestic investors who have seen weights of their equity portfolio shooting up considerably may look to re-calibrate their holdings. That could also prompt investors to turn to a profit-booking mode.