In last week of February, globally the markets started falling. March was one of the steepest falls in the shortest time span. Against this background, the rally in April has taken the world by surprise.
Here in India, the Sensex and nifty gained almost 20% in April. The Indian benchmarks were up almost 30 per cent from the low of 24th of March, thus making April 2020, the best month for equities since May 2009.
This rally in equities is clearly not driven by today’s fundamentals. There seems to be a complete disconnect between what is happening to the economy and the way the market is moving. Looks like there is no co-relation whatsoever between financial markets and the economy today. But having said that, markets have always been 6 to 9 months ahead of the curve & that can be the only justification for this rally.
The other reason for this rally is the concerted action of central banks around the world including the Federal Reserve with respect to providing new liquidity. India is also following this global trend & has come out with it’s own stimulus packages, coming in phases as the situation pans out. There is also a lot of optimism over discovery of the drug to treat Covid-19. Based on this, the investors are looking for a V shaped recovery with excessive optimism.
While all of the above holds true, it is very important to note the difference this time around is that unlike 11/09, the GFC, some earthquake or some tsunami where it was possible to gauge the extent of losses or damages rather quickly, this time we are faced with a pandemic which has impacted many facets of our lives & which is not only limited to just the economic or financial losses.
Social distancing is here to stay at-least for now, which also means hospitality, tourism, restaurants, mobility will be restricted and then this will have cascading effect over many other sectors. The job losses and salary cuts are going to impact purchasing power and consumer behaviour at same time impacting the luxury goods & real estate segments and this can well become a vicious cycle unless acted upon in a timely manner.
Sweden has not gone in for lockdowns like we have back here in India and many other countries. In Sweden, Volvo is experiencing sever cancellations of export orders for commercial vehicles. Volvo is subscribing government program for layoffs where they only pay part of the salary for the reduced work-time.
All these factors indicate that economy may not see a V shaped recovery. There may well be a phase of slump and it would certainly impact profitability of companies and in turn their P/E.
In January Nifty P/E was 28.67 verses current 20.56. Once the results of Q1 and Q2 of current FY are declared, we will need to revise the valuation matrix with new profitability. The valuations of today would certainly be under pressure.
So, investors need to be very cautious. This market crisis may not be over in 2 months because this pandemic presents some very inherent uncertainties. The next three quarters will be extremely challenging & very volatile to say the least. In such times, the thumb rule that should be followed is being very disciplined. Make sure that your investment decisions linked to your long term goals and are perfectly in line with your risk appetite.