Fear dominates hopes
In past 50 days of lockdown, I had a chance of interacting with numerous professionals, investors and businesspersons. The general environment is that of anxiety, fear and pessimism. The promise of a meaningful economic stimulus by the prime minister seems to have rekindled some hopes. Though greed usually accompanies hopes, as of this morning, the fear still continues to be the dominating factor in influencing the investment decisions.
In my view, the following three are the primary sources of rising hopes:
(a) The prospects of total collapse in economic growth and consequent high stress in the financial system is prompting RBI for an aggressive monetary easing. Easing inflation and government’s resolve to bring back the economy on growth path is also helping the sentiments.
(b) There is abundant liquidity in the financial system. As of 6 May 2020, banks had deposited over Rs8.6trn in RBI’s reverse repo window @3.75%. The banks have been reluctant to lend for quite some time now. People are hoping that the government may assure banks on credit losses through some sort of guarantee and motivate them to restart the lending.
(c) The impact of COVID-19 is receding as the most developed countries are reporting flattening of curve. There are reports of an accelerated approval for vaccine to treat the infection.
However, unlike August 2019, when the corporate tax rate restructuring was announced, there appears no urgency amongst investors and businesspersons to catch the first flight, as the fear still is continues to be the dominating sentiment.
The fear is stemming primarily from the structural weaknesses in the economy, anxiety about the future course of socio-economic life, health concerns and likely redundancies of businesses and people in post lockdown world.
From stock market perspective, it is pertinent to note that FY21 earnings estimates have been drastically cut to almost 0% growth from 24-28% growth projected a few months earlier.
The downgrade to upgrade ratio of credit rating of Indian corporates has touched its nadir in the current quarter, highlighting the deteriorating solvency and liquidity profiles of Indian businesses.
The stimulus package, the details of which would be known fully only by Friday evening, notwithstanding its size and shape, is likely to support businesses and economic over a period of time. Many MSME or even larger businesses may not survive till that time.
Under these circumstances, I continue to remain hopeful that we shall get a better entry point in Indian equities during summer of 2020. Till then I shall savor the cash and watch the markets carefully.
I shall keep reminding myself the most inspiring tag line I saw behind a truck: Jinhe jaldi thi woh chale gaye(Those who were in hurry, have passed away.)