Equity Outlook, Nov’20: Rising like a Phoenix from the Ashes


In this note, we map the investment outlook, the impact of the Covid infection, some of the dramatic macro changes in India and other key factors. Many changes have aligned to make the India equity investment story compelling.

India Economy Updates – GDP, Stimulus and Unlock

  • The RBI’s nowcasting model suggests that India’s GDP contracted 8.6% in the July-Sept quarter after a fall of 23.9% in Q1. However H2 should see growth and recovery. RBI cut the repo rate by 75 bps, so the external benchmark-linked lending rate reduced to 7.05%, and repo rate-linked lending to 6.65%. A fall in interest rates will encourage credit, lowering borrowing costs for industry & retail and accelerate growth.
  • India is in an unlock phase from covid, where most economic activities are allowed with SOP to ensure safety. Trains, flights and buses run with restrictions. The worst affected sectors are travel, tourism, hotels, social businesses, restaurants, cinemas, etc.
  • However many industries used the lockdowns to improve efficiencies, rethink business, and reduce costs, fixed & variable. Many large firms became aggressive on M&A too.
  • The high frequency economic indicators like cement and auto indicate a rapid recovery.
  • The GoI has given relief/ stimulus in 3 phases, with a Covid-19 package of ₹ 29,88,000 crore or 15% of GDP. It is targeted at specific industries, and provides liquidity for spending. The RBI loan moratorium allowed loans to be rolled over for 6 months to tide over the period. The latest measures included funding for real estate developers and contractors, fertilizer subsidies, a new employment scheme and spending on rural jobs. MSME’s across 26 sectors get a credit-guarantee program, have a 1-year moratorium on loans and 4 more years to repay.

Covid Virus Infection Updates

  • India: In March India underwent a nationwide lockdown that was one the toughest in the world. Today it has the 2nd highest number of cases after USA of 89.6 Lakh cases, 1.32 L dead and 83.8L have recovered.
  • By Sept there was a peak in India infections, with daily new cases peaking at about 1 lakh. This has dropped to about 38,600 per day and is in decline. There can be a second and third wave, as is starting in Delhi, but with good precautions the infection appears under control.
  • The economy is emerging from the Apr-May deep freeze and indicators are a monthly improvement, with sectors like IT services, pharma, tractors & agro products, some chemicals and certain foods like biscuits, crossing pre-covid levels already.  
  • Global: The outbreak is a threat to the global economy, requiring containment measures like quarantines, curfews and precautions.
  • USA represents nearly 1/5th of the world’s known COVID-19 cases and deaths, and is the #1 on these.  President Trump declared a national emergency on Mar 13, but a weak follow up and lack of simple precautions saw a second and third wave, stronger than previous. The virus appears out of control here.
  • Europe and UK are seeing sharp rises in infections, perhaps aided by cold weather. South America has also done badly. Comparatively Asia has done better, with China almost free, and Taiwan, Japan, Malaysia, Indonesia, Thailand, Vietnam and Singapore faring well.
  • We expect the global economy to struggle in CY2020 and start recovering midway through CY21.
  • The discovery and announcement of vaccines, still under development, is a ray of hope.

Indian Sensex Updates

  • We can see in the graph that from Jan highs, the index crashed in March. By Nov, the Sensex crossed the pre-covid levels and moved to new highs.
  • The post March bets in the stock market basis low valuations and an expected full recovery have come true.  
  • The sharp economic recovery, the slow win over covid and a series of reforms bearing fruit finally for the Indian economy has investors in a positive frame of mind.

Indian Reforms and the Global Context

  • India has undertaken big reforms over the last 4-5 years such as GST, RERA, war on black money, reduction in corporate tax, improving Ease of Doing Business, IBC (Bankruptcy Code), Aadhar based subsidies and bank accounts for all. The GDP fell in 2017-20, but the benefits of reforms may start to bear fruit now, along with a covid recovery.
  • The political stability in India today is another plus.
  • The latest GoI move is Atmanirbhar or Make in India program to encourage Production Linked Incentives and mfg. in India for electronics, defense, pharma, chemicals, auto, white goods, etc. This can be a powerful booster for domestic growth.
  • The large Indian IT Services sector got an unexpected and big gain due to covid. Worldwide firms are asking employees to Work From Home, and IT services and solutions form the backbone for this model. IT spending is up, Indian IT and BPM firms delivered in this tough period, and are indispensable to corporate customers.
  • Covid is a challenge to Indian healthcare. One of the learnings of this crisis is that this sector needs better investments, from GoI, to improve the standards, with more doctors, better hospitals and facilities.
  • Meanwhile USA declared a trade war on China due to big trade deficits, IP protection issues and border tensions. Tariffs have been declared on many imports. Japan and many other countries have also followed suit, and they are developing a China+1 strategy to derisk. India can find a place here as an alternative high volume mfg. base.  
  • China has already got a per capita GDP that is close to 5X of India. Thus it is a high cost economy.
  • Apple Inc. is moving phones mfg. to India, as are a number of electronics firms and several other industries too.

Conclusion and Recommendation

  • The Indian economy is emerging from consolidation (FY18-20) and covid (FY21) with surprising strength.
  • The stock markets after a 37% fall in March, recovered and have moved to new highs. Its not just due to domestic investors. There is liquidity inflow to India from the overheated USA markets, political & economic uncertainty in USA, and opacity in China & Hong Kong.
  • Low interest rates, well targeted GOI stimulus programs and global interest will accelerate domestic capex & investments. We expect negative single digit GDP growth in FY21 and +7-11% GDP growth for the next 5 years.
  • Key risks are 1) any new large Indian bankruptcies or BFSI failures 2) War 3) USA and UK trade relations.
  • Longer term investors need to be fully invested and take advantage of the positive cycle over next 3-4 years.
  • Large caps will stay strong and lead the rally, and mid and small caps will follow.
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This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. Punit Jain is not a medical or covid expert. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an Investment Advisor. Punit Jain is a registered Research Analyst under SEBI (Research Analysts) Regulations, 2014. JM has been publishing equity research reports since Nov 2012. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com.


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