MARKET OUTLOOK

EQUITY

Mr. Neelesh Suraana

CIO

Market Update & Outlook

● Current scenario owing to Covid-19 is indeed an unprecedented crisis. These are indeed uncertain times, and we are processing
information which itself is changing rapidly daily. Domestic Large-caps (NIFTY 50) have corrected by ~29% (~39% during bottom) from
the peak registered on January 14, 2020 and so have NIFTY 50 valuations fallen from 22x historic pe to <17x. FPIs have sold equities
worth $7.5 bn and bond outflows exceed $7bn (data till 25th Mar’20), Source: Bloomberg
● Fundamentally What is unique of the crisis is inverse correlation between solving the health crisis Vs impact on economy. The longer
and striciter the self imposed shutdown the high probability of virus getting under control - however more will be the damage to
the economy.
● I think it’s futile to guess the exact impact of it on economy numbers as no one frankly knows the duration of crisis. What is the
prognosis? It clearly depends on duration and response of which duration is most important. The virus is going to dictate the
timetable of normalcy.
● Globally we have seen certain countries doing well to fight the Crisis : China, Japan, Korea, Taiwan, Singapore and Hong Kong. Few others
notably Europe and USA it’s gone from bad to worse. India perhaps has gone on cautionary shutdown which probably is the right
thing given the lack of medical infrastructure and population density.
● Net net, we would go by the assumption that duration of the crisis is limited to 1 or 2 quarters and its impact limited to maximum
1 year, say FY21 earnings.
● Covid should be seen in context of response globally, and also oil prices.
● Globally, we have seen the acceleration in policy easing/ fiscal loosening is increasing across economies. The global weighted average
policy rate has declined to below post-GFC lows – rates have fallen by 55bp since December 2019 and 167bp since December 2018. G4
central banks have announced aggressive quantitative easing programs. We estimate that the Fed, the ECB and the BoE will make asset
purchases of ~US$6.5 Trillion in this easing cycle, with the Fed alone making cumulative asset purchases of US$4 to 5 Trillion. Fed
indicated this week that “QE is unlimited”, if needed.
● Domestic Policy Action - The current time calls for both monetary and fiscal stimulus, in our view which the market was eagerly waiting for.
● To ease lockdown pain for the less privileged, the government announced an Rs. 1.7 Trillion relief package, a large part of which
will be for free food, cooking gas and insurance. Less than 30% will be a cash transfer from the central government to citizens; the
remaining is frontloading or transfers from state governments. New central government commitments equal 0.4-0.5% of GDP;
the financeminister did not clarify if this will raise the deficit or be offset by spending cuts in other areas. FM comments left a door open
for industry and economic stimulus, without which FY21 real GDP could be impacted
● RBI also as expected announced various measures today:
○ Repo rate cut by 75 bp to 4.4%.
○ Allows three months moratorium on Bothra term and working capital repayments on all loans given by banks and NBFCs. This
moratorium will not lead to asset classification downgrade.
○ Liquidity Measures: Since last MPC, RBI has infused INR 2.8 Trillion liquidity, equal to ~1.4% of the country’s GDP. Today it
announced measures to infusing further Rs. 3.7 lakh crores.
○ Cash Reserve Ratio (CRR) to be reduced by 100bp to 3% which should result in liquidity addition of INR 1.37 Trillion.
○ Marginal Standing Facility (MSF) to be increased to 3% from 2% of SLR with immediate effect.
○ RBI will conduct 3 year tenure Long Term Repo Operations (LTR) for total amount up to INR 1Trillion at a floating rate linked to
policy repo rate.
● These measures like regulatory forbearances for different stakeholders and measures to ensure smooth functioning of the fixed
income markets
● Savings from oil will help: Oil prices have fallen almost 50% since the start of March, as the supply outlook has been hit by a
Saudi/Russia price war and demand has been hit by COVID-19 containment measures and associated downward growth. We believe
that savings from oil is extremely substantial for India and will help in giving fiscal stimulus. Assuming brent price forecast of USD
30/bbl, gain to India is in excess of INR 2.5 Trillion (~ 1% of GDP). The gain from low oil prices can be shared between central, state govts
and the consumers.
● Valuations and market outloook
○ A fundamental point in equities is that generally markets are myopic - ‘stock price’ reacts disporportionately to short-term
developments, i.e., coronavirus reaction has been violent; whereas the “value” is driven more by long-term assumptions and
DCF based valuation do not change significantly. For example , a stock or business pre crisis was say value Rs 100, and the price
was X, today the price is half, whereas business value has changed not more than 10 percent.
○ From markets viewpoint It is important to look at Covid-19 as a “one off event” which at best would impact 2-3 quarters or one
year of earrings. In this context, P/BV would be better measure for valuation, rather than P/E on immediate earnings.
○ Coronavirus will have minimal impact on FY22 earnings. FY 22 PE would be about 13x times even after a hit of 20%.

○ Why it’s different from GFC: while the event are different and without going into debate of which is different , from market
valuation there is one major difference - markets were cheap even before coronavirus unlike December 2007, Also we have
strong economic fundamentals like oil, current account etc and weak markets before this crisis - GFC was opposite - markets
were in party zone in Dec 2007, unlike February 2020.

Portfolio Strategy
● As a house, we have been following a two-pronged approach – it is a sort of barbell strategy. First priority is to buy high quality
businesses, which have now corrected. The other spectrum we are also participating in “deep in value” businesses. Please note that the
second bucket was attractive even before the virus issue.
● Today, it’s not about which sector is attractive - we are getting favourable value across sectors.

● Recommendations for Investors

○ Whenever there are such crisis, It's important to visit two basic tenets (a) like many crisis this too will come to an end, post the
ongoing impact, and (b) It's extremely important to maintain asset allocation discipline.
○ Current times remind us of famous quote by Warren Buffett “Be fearful when others are greedy, and be greedy when others are
fearful”
○ The correction in ‘stock prices’ owing to Coronavirus which may be a short term event, is much more than the ‘value’ of many
businesses, thereby increasing the ‘margin-of-safety’. We recommend investors to balance and front-load asset allocation in favour
of equities.
○ Asset allocation : Considering the sharp equity market correction, the investors should rebalance their equity exposure
by increasing allocation. Example: If an investor had a 70:30 Equity, Debt Allocation which after the correction has become
50:50, clients should rebalance it back to 70:30, based on their risk profile. We would recommend investors to look at equities and
allocate capital which is not required for next 3 years. Further he should front load next 12 months savings now.
○ How to spread investments? In this context, for large allocations, we would recommend investing about 50% lump sum, and
remaining can be spread over the next few weeks.
○ For others, SIP’s and STP’s are the most efficient way of capturing the volatility/downside.
○ We would recommend 70:30. 70 percent could be offering like large cap, hybrid or focus fund. 30 % allocation could be in
Large & Midcap or Midcap Fund.

Disclaimer: The information contained in this document is compiled from third party and publically available sources and is included for general information
purposes only. There can be no assurance and guarantee on the yields. Views expressed by the Fund Manager cannot be construed to be a decision to invest.
The statements contained herein are based on current views and involve known and unknown risks and uncertainties. Whilst Mirae Asset Investment
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