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Lockdown extension will disappoint markets; Nifty may re-test 7,500 levels

The economy, one must understand, is not a light switch. One cannot just push the on and off button at will. It takes time for the economic activity to revive

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Coronavirus | Lockdown

U R Bhat  |  Mumbai 

Don't see much upside in the markets till at least a quarter: U R Bhat
The markets were expecting a gradual opening now. Sadly, there is no opening at places that matter, especially the metros, said Bhat

The were expecting the to enter the fourth phase, but were hoping for more relaxations. However, the onus is now on the state governments, who will decide on the red, orange and green zones. That said, major production centres are outside major metros. As far as manufacturing is concerned, will are still not back at the pre-Covid-19 levels. So, the index of industrial production (IIP) will continue to suffer if only parts of India are open for business/manufacturing. The gauge for services production will also continue to suffer.

As regards the government’s stimulus measures, I feel that the have always been very selfish and still continue to be so. They were expecting the removal of long term capital gains tax (LTCG), a cut in short-term capital gains tax (STCG) and a host of other measures. I don’t think all these are a priority for the government right now – and rightly so. The more serious issue is that industrial production is suffering. My personal view is that things will get worse from here as far as the economy is concerned. This for a simple reason that all the recent measures undertaken by the government, though in the right direction, will not bear fruit immediately and the long-term impact is not the need of the hour. The June 2020 quarter will actually be a write-off. Don’t be surprised if the biggest of companies in India start showing losses. That said, the are in for a lot of trouble given these developments. Some information technology (IT) companies may be a silver lining here as they may show some performance due to the work from home (WFH) policy. Most manufacturing companies, however, have no production and are in a very bad shape and it will be another two weeks now before the government considers what to do post 4.0. The economy, one must understand, is not a light switch. One cannot just push the on and off button at will. It takes time for the economic activity to revive. The June 2020 quarter will be really bad.

Against this backdrop, the markets will continue to remain volatile and the Nifty50 may re-test the recent low of 7,500 levels. That said, it has strong support as the index has made a double-bottom here. It can slip below this level only if things (read economic situation) get worse from here. The markets were expecting a gradual opening now. Sadly, there is no opening at places that matter, especially the metros where the big companies are situated and are the hub of major economic activity. The only silver lining here is that inter-state movement of goods and people is allowed, subject to conditions. Though a positive, this will not give a huge impetus to economic activity, which can begin in earnest. However, I don’t see much growth happening in the short-term. The markets, against this backdrop, will continue to remain disappointed with the 4.0 norms and the fact that we are nowhere near a stage where we can open the lockdown in a meaningful way.

(U R Bhat is managing director at Dalton Capital. Views are his own)

(As told to Puneet Wadhwa)

First Published: Sun, May 17 2020. 20:01 IST
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