Markets will be choppy amid 21-day lockdown; recovery to be slow, painful

The sharp fall in the Indian markets from their recent peak triggered by the coronavirus (Covid-19) pandemic is factoring in the 21-day lockdown to an extent, but the recovery from these levels will be a slow and a painful process, say analysts. Given the developments, they expect fiscal and monetary support from the government and the Reserve Bank of India (RBI) to revive sentiment and expect the markets to remain choppy as they track the pandemic-related developments.

“Ever since the announcement of the Janata Curfew, the market was anticipating a longer lockdown. The fall in the Nifty has more than adequately factored in the three weeks of earnings that most companies will have to forego. A big rate cut by the RBI alongside waiver of non-performing asset (NPA) norms for a period of time is all but inevitable now. The government is taking the fight against Covid-19 deep into the Indian summer with hope that the heat will ultimately eviscerate the virus. The fight has to be won before the monsoons arrive. Else, all hell could break lose,” said Saurabh Mukherjea, founder and chief investment officer (CIO) at Marcellus Investment Managers.

From the peak in January 2020, the S&P BSE Sensex and the Nifty50 have tanked around 37 per cent each, while the carnage in the mid-and small-caps has been even more brutal with both these indices slipping 36 per cent and 38 per cent, respectively during this period.

“There is no big participation in the markets right now and I think exhaustion is creeping in now. However, a slight negative news can again trigger a fall. One needs to be careful at these levels. To some extent, the markets were anticipating a lockdown scenario given how fast the virus is spreading,” said U R Bhat, managing director at Dalton Capital.

As regards the RBI, analysts at Barclays agree with Mukherjea's view and expect the central bank to cut rates aggressively over the next few months to counter the economic slowdown and support market sentiment.

“We now see the RBI moving close to 65 basis points (bps) at its April policy meeting, and believe an additional 100 bps of cuts is needed to stabilise market sentiment between the June-August policy meetings, along with outright bond purchases through OMOs, possible forbearance for bank loans and targeted liquidity windows for banks and NBFCs,” wrote Rahul Bajoria, Chief India Economist at Barclays in a recent report.

Over the next few months, Edelweiss expects market to remain choppy and eye liquidity support and policy initiatives from the state governments.

“There’s plenty of monetary room, little option on the fiscal front and while India’s Covid-19 spread has been modest so far, policy has lagged. This could weigh on India’s relative economic and business damage, and eventually, the market’s recovery. Near-term market and stock calling, particularly levels, are more matters of faith and investing beliefs, than playbooks,” wrote Aditya Narain, head of research for institutional equities at Edelweiss Securities in a co-authored report with Prateek Parekh and Padmavati Udecha.

That said, most analysts agree that valuations for the Indian markets have become attractive after the precipitous fall. “The Nifty is trading at a trailing price-to-earnings (P/E) of 14.7x, lowest in six years while trailing P/B of 1.9x is at its lowest since the Global Financial Crisis (GFC). Market-cap to GDP is at 49 per cent, again lowest since the GFC,” said analysts at Motilal Oswal Securities.