Those who have knowledge don’t predict, and those who predict don’t have knowledge, goes the famous proverb.
When you sit and ponder what will happen next, you realise things are not as simple as they once were. You also realise that as more things change in markets, more they remain the same.
Looking at the recent developments, it is time to take some contrarian bets and increase allocation to equities according to your asset allocation plan. Markets around the world have sold-off sharply as anxiety about the worldwide spread of coronavirus (COVID-19) lingered and concerns grew about the ability of governments to control the impact of the disease on their economies.
Back home, markets have had multiple problems to deal with. Apart from fears of spread of the virus affecting the growth prospects, the developments at YES Bank contributed to the correction. That said, the Indian financial system is quite robust and the swift action taken by the government and the Reserve Bank of India (RBI) will restore confidence back into the system.
The Nifty has corrected 13 per cent from the all-time high on January 20, 2020. Most stocks traded on Indian bourses topped in early 2018 on introduction of long term capital gain tax (LTCG). From January 2018 high, an average Indian stock is trading lower by 45 per cent. In fact, 75 per cent of stocks are trading below their 200-day moving averages (DMAs), suggesting extent of correction in the prices. Stock prices have factored in most of the bad news and if prospects improve, there is disproportionate scope for appreciation. Investors should summon the courage and allocate some of capital to quality small-and mid-cap stocks.
Central bank action
The US FOMC lowered its target range for the Fed funds rate by 50 basis points in an emergency meeting and other central bankers, too, are following Fed’s lead. Hopes of co-ordinated global reduction of rates is leading to slump in treasury yields. The benchmark US Treasury yields have crashed to fresh all-time low.
Central bankers don't seem to have learned a lesson from the global financial crisis as they refuse to acknowledge heavy leverage was the root cause. Today, we actually have even more debt as a percentage of the global economy that we had back then in 2008. Ultra-low, or near zero rates, are encouraging a debt bubble and when it pops, it will lead to even bigger problems for the global economies.
Many investors wonder how effective monetary stimulus, or even some forms of fiscal stimulus, can be in the face of a “supply shock” — the type of economic hit caused by the absence of goods and services as the virus forces factory shutdowns and curtails transportation and travel. To a man with hammer, everything looks like a nail. Similarly, central banks central bankers are pumping in huge amount of liquidity in global financial systems, and attempt to solve the problem. Global economy will get a much needed booster dose to limp back to normalcy as these measure show their effect.
That said, Indian economy is passing through the rough patch since the last few years. However, there are some early signs of revival in growth. Manufacturing and Service PMI are improving; eight core industries are recording growth on the back of expansion in the production of coal, refinery products and electricity. The latest policy tools brought into use by the Reserve Bank of Inia (RBI) in the form of long-term refinance options (LTRO) and postponement of gilt maturities through operation twist have added significant monetary stimulus to the financial system.
Rupee and gold
Despite this, the Indian rupee is one of the worst performing currencies in recent weeks. Foreign fund outflows and unconventional monitory policy is putting pressure on the Indian unit. The RBI has enough firepower to support rupee as and when they choose to and I expect the rupee to stabilise after this minor depreciation.
Money managers flushed with funds need a safe place to park excess liquidity. Uncertainty-related trade war and growth worries on spread of CoVID-19 has been driving flows into gold. ETF holdings have risen to all-time high near 2,673 tonnes. The speculative net long positions have reached a new record.
As the rise in gold price has more to do with investment demand rather than the actual underlying use in form of jewellery, it is susceptible to sharp bouts of sell-offs. While we turned bullish on gold in 2019 and expect prices remain firm in the near-term, over the next few months, one can expect some serious profit-booking as growth pangs subside and confidence in financial assets recovers.
Disclaimer: Devarsh Vakil is Head - Advisory (PCG) at HDFC Securities. Views are personal.