Stock Investors, Take Heart, This Too Will Pass – Gaurav Garg, Head- Research, CapitalVia

Business Wire IndiaWhen Indian stock market was crushed under the devastating impact of Coronavirus in March this year, the doomsayers had a field day. Many drew a comparison to the 2008 stock market meltdown which lasted for 18 months or more.

But Cassandras were proved wrong. By June, the market slowly began to recover. In five months, Sensex rebounded by nearly 50% from a low of around 25600 in March. Nifty too vaulted from 7500 to 11500 during the period. 

The stimulus package by the government, repo rate cut and moratorium on bank loans all helped inject some liquidity into the market. Nonetheless, a bearish sentiment is palpable for two reasons. First, the pandemic is yet to be tamed. Secondly, the economy has recovered only partially.

This hasn’t prevented investors from feeling optimistic. They know that despite the short-term jitters, there are several strong indicators for the stock market to perform well in another 6 months to one year. The Indian GDP growth prediction is robust for FY22 and another round of stimulus package might also come.

The domestic rating agency India Ratings and Research recently revised downwards its GDP growth forecast for India to -11.8% from -5.3% for FY21. However, it anticipates GDP to grow by 9.9 % in FY22. Earlier, IMF predicted the Indian economy to degrow by 4.5 % in the current year. But it too expects the growth to touch 6% in FY22. Though the growth is based on a low base in the current year, it signals a positive outlook for the next fiscal.

“We strongly believe that the worst is over for the stock markets. Lower GDP growth for the current year has already been factored in and further revisions on the growth rate will not have much adverse impact. Nifty can even touch 14000 in one year from the current base of 11500,” said Gaurav Garg, Head- Research, CapitalVia.

A scare of the second round of Corona wave in several countries in the world had triggered a crash in the stock market in September. But this could be a temporary phase as the market steadied towards the end of the month. A rise in Covid-19 cases in India and another phase of lockdown should not cause much concern as the country already survived around two months of total lockdown. Commercial production of Covid vaccine could wash away all the blues from the stock market by next year.

On the domestic front, a bountiful monsoon augurs well for the economy. This could persuade the farmers to sow more by making use of the relaxation in the bank loan norms. Higher gold price could come in handy for the farmers who will be seeking to explore all avenues to raise funds. After the opening of the economy in May, the pledging of gold for money has increased. The gold prices have escalated by as much as 40% from last year. Robust performance in agriculture is definitely going to influence the stock market in a positive manner.

Another factor noticed during Covid pandemic is the emergence of the new retail investors. The stock market rally in the last few months has been heavily supported by this class of investors who belong to the younger generation. As most of them are well educated, they do a thorough study and some even undergo training before taking the shot at the stock market. In contrast, the stock market crash in 2008 saw retail investors sustaining heavy damage with their higher exposure to small and mid-caps.

The bourses are looking forward to this segment of investors as a string of IPOs hit the market. Despite the corona scourge, all the IPOs are getting subscribed well, an indication of investor interest in the market. However, trying to book profit early after subscribing to the IPOs is not a good practice especially if the objective was not to take listing gains but to participate in the long term growth of the company. The key to reap significant gains is to stay invested undeterred by the short-term fluctuations. The markets are likely to be tested more by global factors than the domestic factors in the coming months.

As expected, the Q1 results of the companies were bad due to the total lockdown in April and May. But several sectors are expected to show better results in the second quarter. IT and Pharma companies are at the forefront of sectors that are doing well. Both sectors have benefitted from Covid-19. There is an increasing belief that Corona could spur another wave of outsourcing for IT companies. Other sectors like FMCG and Banks are also improving after a temporary setback. FMCG sector may benefit from the surge in demand anticipated in the third quarter.

The recent SEBI directive for the multi-fund companies to allocate 75% of the funds equally to large caps, mid-caps and small caps may work out in favor of the last two. Earlier there was no guideline on allocation which was fixed at 65% and the funds mostly went to the large caps. However, if, by implementation of this, funds go to mid-cap and large-cap sector, companies can see some momentum there.

Overall, the economy and markets are better prepared now to handle any situation that may arise of Coronavirus and the amount of uncertainty is very low. Domestic factors look strong in the long run and in the short run as well, markets might be influenced more by global factors.