The economic impact of Covid-19 has been huge and devastating. Actually, the damage is yet to be quantified. Since the lockdown has been unprecedented, quantifying the damage also has become a major challenge. All experts are baffled. When the legendry investor Warren Buffet, well known for his optimism and accurate predictions, was recently asked what would be the impact of the pandemic on the US economy, he with all humility answered, “I don’t know.” This is a reflection of the bewilderment and confusion among experts. Economic growth models, which have not factored in lockdowns, are inadequate in analyzing this unprecedented crisis.
What will be the impact of the crisis on the Indian economy? Growth projections that vary wildly – from 1.9 percent expansion by IMF to 5.2 percent contraction by Nomura – is a reflection of the total lack of clarity. Also there is no clarity on corporate earnings in FY 21.
But there are many things that we know. The global economy is sure to contract, perhaps by more than 3 percent. With gradual lifting of the lockdowns, and learning to live with the virus, economic activity will pick up and H2 will be much better. With increasing herd immunity or discovery of a vaccine, a sharp rebound in economic activity is possible in 2021.
What about the market? The market behaviour has been interesting. After the massive crash in end March, globally markets have rebounded sharply. Nifty recovered 50 percent in April from the March low of 7511 and as on May 20, is above 38 percent from the lows. The globally synchronized markets are led by the mother market US. It is interesting to note that Nasdaq is just 5 percent below its all time highs. Why are markets displaying relative strength even in the context of unprecedented economic damage?
The simple answer is that humongous liquidity has been created by the central banks of the world. The Covid-19 QE is 4 times the QE created during the 2008 crisis. Central banks can create liquidity, but the markets will decide where this money will go. It is common sense that lot of money will chase stocks. India, too, can expect massive FPI flows once the dust settles and clarity emerges on the economic and market scene. The market resilience is largely due to these expectations and confidence that either the virus will be contained or that it will subside.
When the FPI money comes, it is likely to chase quality large caps. We might again witness a scenario of the indices being lifted by a handful of stocks. Telecom majors, a few large private sector banks and mortgage lenders, insurance companies, pharmaceuticals, large IT and some FMCG companies are likely to ride the coming bull run. Investors should prepare for that. Many mid and small caps are cheap; but investment in this category should be ideally done through the mutual fund route.
Markets have an uncanny ability to surprise. With unprecedented global liquidity and historically low interest rates, markets are likely to surprise on the upside even amidst gloomy economic scenario.