Lockdown extension was expected; stimulus measures are a disappointment

The government's recent stimulus measures, however, may disappoint the market because they were expecting huge fresh liquidity infusion into the system to improve the aggregate demand

The extension of nationwide lockdown until May 31 is not completely unexpected. When India started lockdown in March, it ranked 60th in terms of the number of Coronavirus (Covid-19) cases in the world and has risen through the ranks since then. The number of cases in India has been growing at a steady pace and the markets had anticipated this to some extent. As a result, a major impact on the markets is ruled out for now.

The government’s recent stimulus measures, however, may disappoint the market. That’s because they were expecting huge fresh liquidity infusion into the system to improve the aggregate demand. Job losses and pay cuts have wreaked havoc and the morale of people is quite low. When Prime Minister Narendra Modi announced that the government will unveil Rs 20 trillion (10 per cent of GDP) package to revive the economy against the Covid-19 outbreak, there was an expectation of liquidity infusion and money in the hands of people. The package contains everything – right from reforms in select sectors and options for loans – but has not addressed the immediate problem.

Going ahead, the market will fall but there won't be any drastic correction from the current levels. Despite the recovery from the March lows, we are still much below the peak levels. The developments over the next few days and the quarterly results for the March and June quarters will keep them volatile and the overall sentiment in check.

That said, although the market is quite disappointed with the stimulus measures announced, I am happy because had the government really opted for a huge infusion of liquidity via printing currency, the long-term outlook of the Indian market would have been severely impacted. In the short-term, the market is expected to fall between 2 - 5 per cent given the lockdown extension and the policy measures.

For investors, it is advisable to not to invest in equities via borrowed money / leveraged position. One should set aside up to 20 per cent of cash and invest largely in businesses that are up and running, such as pharma, essential goods like fast-moving consumer goods (FMCG), select chemical firms, and telecom. Markets have rewarded investors in these businesses in such a challenging time and, in my view, these firms will continue to do well going ahead.

Investors will be better off not investing in high beta stocks such as infrastructure, banking, or non-banking financial companies (NBFCs) as there is still a lot more pain left in the economy.

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G Chokkalingam is the founder and managing director at Equinomics Research

(As told to Swati Verma)