This is the Big (crisis) one — human, economic, financial (HEF). The HEF is more severe than the global financial crisis (GFC). The over 30 per cent fall in the markets reflects the HEF uncertainty; economic dislocation, earnings rips, and more fundamental resets will follow. We expect volatility to continue; near-term market and stock calling, particularly levels, are more matters of faith and investing beliefs than playbooks. This holds true for growth and earnings resets and extrapolations — they will come as the virus is reined in.
The Prime Minister has announced an unprecedented three-week lockdown to contain the spread of coronavirus. Given the nature of the crisis and the consequent containment measures, forecasting corporate earnings for FY21 has become difficult with existing earnings estimates facing sharp downside risks. It is prudent to look at the trailing valuation metrics. The Nifty is trading at a trailing price/earnings of 14.7x, the lowest in six years, while the trailing price/book value of 1.9x is the lowest since the GFC. The market cap to GDP ratio is at 49 per cent, which is also the lowest since the GFC.
Possibly taking lessons from the demonetisation experiment, the lockdown is expected to be backed up by an economic package and monetary policy support towards sections of the economy most hit by the disruption. Having said that, it is pertinent to note what seems to matter most for the stock markets — fiscal policy, monetary policy, policies aimed at “flattening the curve”, and the flattening of the curve.
The preparatory phase of a Sunday lockdown and the various state governments extending restrictions have given decent preparation time. This increases the likelihood of the effectiveness the 21-day lockdown. From a market perspective, we believe the actual spread of the disease in India will become less relevant (unless the numbers really blow up, say beyond 50-60K), with the focus now shifting towards the extent of disruption caused by the 21-day lockdown. The global capital markets sentiment would hinge on a sustained drop in new daily case counts in the US and Europe.
Geojit Financial Services
Enforcement of the 21-day lock out of the nation will be a major challenge. The temporary shock to the economy will be huge. But if we come out of this lockdown successfully, economic recovery can be sharp. The choice in this crisis is limited. That's why the PM said, if we don't do this 21-day lockdown, we will go back to 21 years. Effective practical enforcement of the lockdown will require massive support from the central government including income support to poor households, forbearance on NPA classification and EMI repayment
Kotak Institutional Equities
The decision to implement a complete lockdown (barring essential services) in for 21 days may help slow down the spread of COVID-19. We hope the government and the RBI provide the necessary fiscal and monetary support to counter the inevitable economic slowdown. We believe the recent bold political and social measures must be backed by bolder economic ones.