Why is the Indian stock market not falling further?
The question is fair, given the risky asset class in a country struggling with its most horrific calamity since its violent partition and independence almost 75 years ago. New daily Covid-19 infections have remained above 300,000 for two weeks now, the worst case count the world has seen. The death rate is over 3,700 – likely much higher if you ignore underreported official statistics.
The fear of the virus is everywhere. Even the rich and powerful find it difficult to fit out a hospital bed or find an oxygen cylinder.
But in all of this, the benchmark Nifty 50 is down slightly, recording a decline of less than 5% since mid-February.
At 32 times the profits, or almost double the valuations in China, the Indian market is super expensive. The logic behind these prices is this: unlike last year, there is no national lockdown. And there may not be if the peak of the outbreak is a week or two away, as some epidemiological models indicate.
In addition, investors know from the first wave in 2020 that companies will protect their profits by slowing down operations and laying off workers when necessary. Those who keep their jobs can reduce their discretionary spending. Their excess savings will gravitate towards stocks even as the pain builds up in small companies that do not trade in the public markets.
Another reason for optimism is the expected response from the authorities. This is based, again, on the experience of last year. If more infectious variants of the disease make a nationwide lockdown inevitable, the finance ministry and central bank could unite to offer moratoria, state-guaranteed loans, and other liquidity-enhancing measures to compensate for the disappearance of cash flow. Indeed, the Reserve Bank of India on Wednesday announced repayment relief, as well as funding of 500 billion rupees ($ 6.8 billion) over three years at its key rate of 4% for banks in expand to vaccine manufacturers, hospitals and oxygen suppliers.
There is undoubtedly more leeway for political action than there was just a few months ago. Bond and currency markets have given up on opposing further fiscal and monetary easing. Traders who drove long-term yields on government securities higher – or pushed the rupee lower – have pulled out. Just like last year.
But all of this ignores a basic reality: India 2021 looks nothing like 2020. A year ago, early and severe physical distancing measures caused panic and misery among living rural workers. in the towns. But the health care system has not been overwhelmed. Worse still, the virus has now infiltrated the villages. Areas that last year provided refuge and work for returning migrant labor may themselves need support. As for large companies that manage to protect profitability, the thesis may not hold if commodity prices remain at their highest level in a decade. Unlike this time of last year, industrial metals, energy and agricultural products are all strengthening globally.
There are other differences. In 2020, rich capital-providing countries had no vaccines, let alone immunization programs, which work much faster than in India, where only 2% of the population has obtained the two doses required so far. . Gross domestic product growth for the current year could be 9.8%, down from its March estimate of 11%, if infections peak in May, according to S&P Global Ratings. One more month of rising cases could slow the expansion to 8.2%, after an 8% drop in production in the year ending March 31.
While not completely derailed, the economic recovery this year will likely dissociate itself from the United States, where Treasury Secretary Janet Yellen hints at “somewhat” higher interest rates to avoid overheating from more stimulus from the government.
BNP Paribas SA recently downgraded India to “neutral†after “overweighting†in its portfolio of Asian models. In an interview with Business Standard, Manishi Raychaudhuri, head of research on Asia-Pacific equities at BNP, warned against “consensual downgrades in Indian earnings estimates, which seem optimistic to us anyway.”
Caution is in order. So much about the pandemic – and its interaction with an ill-prepared health system – is unknown. The consortium of laboratories responsible for sequencing the genome of the virus had warned in early March against new “very prolific” variants. The result of ignoring scientific advice and allowing everything from large weddings and large religious gatherings to crowded election rallies, may not yet be entirely clear. A model from the University of Washington’s Institute for Health Metrics and Evaluation predicts more than one million deaths by the end of July, nearly double the number of deaths in the United States and more than four times the India’s current official tally.
Global investors, who remained confident in China and India last year, are not waiting for stock analysts to change their minds. They sold India in April and bought South Korea and Taiwan instead. This may be more careful than pretending that the second wave is just a larger version of the first with predictable consequences. From what we’ve seen so far, that’s clearly not the case.
© 2021 Bloomberg LP
