Home > Markets > Stock Markets > Post gains, brace for equity pain

April was the best performing month in 11 years for Indian stocks, underscoring the growing disconnect between the stock markets and the real economy battered by the novel coronavirus pandemic that is showing little signs of abating.

The more than 14% rally in shares in April was overdone, according to some experts who cautioned that a 6% decline in May so far is an indication that more pain may be in store.

They said that in mirroring global peers, which are flush with liquidity thanks to a host of stimulus measures, stock markets in India have run ahead of themselves even as they take cues from developments on drug discoveries for a potential cure for the respiratory infection.

Market watchers maintain the biggest gain for the markets has clearly come from the liquidity thrust in advanced economies of the US, Europe and Asia, even though India’s own approach to stimulus has been distant with limited impact and is rather minuscule compared with the scale and size of liquidity boosting measures of many other countries.

“That said, India is still one of the worst-performing markets among emerging markets. So, any pullback in global markets will likely negatively impact our market as fundamentally nothing has changed since the first initial fiscal package and mid- and small-sized businesses are strapped of cash-flow, which in turn is now negatively impacting the whole financial sector," said Andrew Holland, chief executive of Avendus Capital Public Markets Alternate Strategies.

India was among the countries with the biggest drop in traffic congestion in April relative to 2019. Pollution levels have also fallen due to a sharp decline in industrial activity and traffic. There has been a 24% (year-on-year) drop in electricity generation for April, while auto sales were nil and April manufacturing PMI crashed by 24.4 points to 27.4. Also, the closure of six major credit-focused mutual funds due to covid-19 triggered illiquidity in lower-rated corporate securities, serving as another reminder of elevated financial stability risks.

“Investment case for India has weakened given its limited ability to provide significant stimulus without impacting credit rating and India’s higher dependence on the unorganized work force. The upcoming earnings season will see material cuts to earnings, especially the financial sector, including NBFCs," said Credit Suisse.

To be sure, Indian stock markets slumped 40% in March from record highs touched in January post which foreign institutional investors (FII) sold equities and debt totalling $15.95 billion. On the currency front, the rupee is one of the worst performers in Asia. In 2020, the rupee has weakened 5.52% against the dollar.

Global markets have, meanwhile, rallied on signs of a flattening infection rate in major developing economies and forceful policy support.

Goldman Sachs expects the Indian economy to recover more gradually than some of its North Asian peers. “While markets may not retest fresh lows given reduced global risks, we believe Indian equities are likely to relatively lag the region on expectations of a slower recovery. However, more forceful policy stimulus could pose a risk to that view," it said.

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