Budget sops, Covid-19 tax surcharge: Market expectations from 2021

The calendar year 2020 (CY20) for the markets has confirmed the old adage of stock markets – 'expect the unexpected'. Though Covid-19 had begun to raise its head at the beginning of the year, it was expected to be a regional issue with the rest of the world remaining largely unaffected. The markets were steadily moving up in the last few weeks of 2019 and it was expected that momentum would continue in the New Year with reforms gathering pace in the second term of the Modi Government. Covid-19, however, induced crack in March 2020 took many by surprise and was seen as a sure death for those affected by it.

Most of us look at the future with an assumption that we would be alive to participate. When our very survival is at stake, it's futile to guess the future of the economy. The fear of the unknown was at its peak.

With the country and the economy coming to a halt, businesses shut, and no clarity on when normal life would resume as most of us were confined to our homes, one would have expected people to have resigned to their fate. Fortunately that wasn’t the case. Those who could align their businesses to the requirements of Covid-19 situation, did so with alacrity. New opportunities mushroomed and one of them was the stock market. This was among the few activities that were not stalled by the government, despite cries to halt trading due to the steep fall.

Those sitting at home with not much of other activities but a comfortable bank balance, explored trading on the stock markets. One could call it a 'beginners luck' – as most of the around 60 lakh new investors who came in from March 2020, would have made extra-ordinary profits since markets have rallied more than 75 per cent from March lows. Nobody could have expected such a spirited move back then. And now, they have been pumping more liquidity as confidence has risen significantly. Foreign institutional investors (FIIs), too, have been aggressive in the last couple of months.

The earnings in the last two quarters have surprised most analysts with better-than-expected numbers. The fund raised by Reliance Industries Limited (RIL) during the Covid-19 pandemic from marquee global investors was another unexpected surprise. The macro numbers have been improving month-on-month with goods and services tax (GST) collection, consumption data, PMI as well as some of the core sectors such as cement, power, coal, fertilizers witnessing growth.

The Government, too, initiated stimulus measures but it seemed more of a publicity blitzkrieg than the real benefits as publicized. However, it helped ease the working capital squeeze in the organised SME segment. Meanwhile, the Covid-19 numbers were moderating globally, the survival rates had improved significantly. Discovery and release of vaccine aided sentiment. Most of the regulatory and credit rating agencies issued fairly positive commentary on the state of the economy compared to their view in May/June 2020.  

We had moved from abject hopelessness to a level of renewed confidence that India would get back on track to be among the fastest growing economies by financial year 2021-22 (FY22)-end. This translated to exuberance in the markets, which kept feeding on the liquidity leading to a virtuous cycle. Though recent reports suggest that we could be in the beginning of a new bull run akin to 2003 to 2008, I believe that the bubble created due to stretched valuations, can become bigger with liquidity flows. A part of this is also the Dollar Index play as USD is expected to depreciate against major currencies. And liquidity generally is a fair weather friend.

One of the key ratios to gauge the valuation of the market is the Market Capitalisation to GDP Ratio, which is around 95 per cent currently – a bubble territory. Though we have seen the ratio close to 150 per cent during the 2007 boom, the melt down post that led to 50 per cent erosion of market-cap.

The big question is whether this boom can continue? As mentioned earlier, if the cheap liquidity flows continues and the market feeds on itself, we could see the run continuing a while longer and the bubble getting bigger. On the market fundamentals, even if we witness 8 per cent to 10 per cent growth in GDP growth in FY22, we would still be below the 2019 levels at the end of 2022.

Investors are getting excited looking at the earnings of few of the significant entities among the around 4,000 listed ones. Additionally, there are 12.6 lakh registered companies in India and 4.25 crore of smaller businesses employing the mass. Speaking to a cross section, it’s clear that most of them have suffered due to Covid-19 and many have scaled down or shut operations. The big boys have become bigger despite the economic slowdown – clearly at the cost of the smaller ones. Thus there would be a dilemma on how the economy can grow consistently if a large part of the businesses are still suffering from the slowdown and unemployment, including disguised unemployment is high.

Though vaccination will be available soon, how long will it take in India for the last man on the street to be vaccinated? Do we have the advanced logistics for the same? Can there be another wave leading to curtailment of economic activity as people tend to become carefree with the introduction of vaccines. There are many businesses which would have a longer term impact or a permanent damage.

Though many new opportunities have arisen due to the Covid-19 situation, how many of the severely affected businesses can change their business model effectively and revive. Travel & Tourism is one such sector, which is a large employer, with an uncertain future. The wedding ecosystem, too, will take a long time to revive and similarly there are numerous other such businesses. The huge consumption revival we witnessed last few months could have been a combination of pent-up demand, festive demand and inventory replenishment at the retail level. Unless we see the demand continuing next couple of months, sustainability is questionable.

The Government, too, is clambering for funds, so I don't think we should expect an investor-friendly budget in 2021. After reducing corporate taxes last year, we could see a Covid-19 surcharges being introduced.

On the corporate performance front, analyst expectations would rise further, leading to possible disappointments. India will have to work harder on its relationship with the US as the new President takes over in January 2021. Meanwhile, China may continue to keep the border situation hot. The farmer’s agitation seems to have put the Government on the backfoot for the first time in the last 6 years and this could be an acid test.

Overall I don’t doubt India's ability to grow, but markets seem to have discounted a bit too much a bit too early. With street expectations lopsided, I would abhor to think of the unexpected.

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Ambareesh Baliga is an independent market analyst. Views are his own.