Market is consolidating due to global concern

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The market started this week on a negative note due to the unexpected rise in coronavirus cases in Italy and South Korea, even as situation in China improved last week. As on February 26, more than 1,250 and 325 cases were reported in South Korea and Italy, respectively. The concern on the rapid spread of coronavirus was heightened due to limited knowledge on the cause and spread of the disease and the fact that it has spread to the rest of the world faster than anticipated. It is being presumed that the sudden raise in Italy was due to hospital mishandling. This has prompted closure of many public and workplaces in China, Korea, Japan and Italy hinting that the economic effect and loss of GDP will be higher than forecasted last week.
Till last week, world financial markets projected that this is not going to impact our economy and corporate profits. The world equity market like S&P500 hit a new high last Wednesday. From that level S&P is down by 8% and bond yield has started to reduce, suggesting that investors are expecting slowdown in economy and cut in Federal Reserve interest-rate. IMF had forecasted world GDP to improve by 3.3% in CY20 from 2.9% in CY19. Post the recent G20 meeting with Finance Ministers and Central Governors, which stated that economic recovery in their respective countries has been fragile, IMF is contemplating on cutting the world GDP forecast to 3.2% and assuming 0.4% impact on China and its economic growth may slow to 5.6% in CY20.
The financial effect on India will be during Q4FY20 and Q1FY21 (January to June 2020). The forecast for India GDP is between 6% to 6.5% in FY21. The slowdown in China and rest of the world is expected to have a moderate effect on India, the forecast may be downgraded to a lower range in the coming quarters. In-terms of sectors the impact will be more in Auto and Auto Ancillaries, Pharma, Metals, Agriculture and exporters, given high correlation to the rest of the world.
India’s corporate earnings growth in third quarter of FY20 was good, providing hope of improvement in trajectory. Based on Nifty50 index, all the companies have given good results except for Yes Bank, net profit has grown at a healthy rate of 21% on a YoY basis which is marginally below the expectation of 26% growth. The corporate performance does not match with the dull domestic economic data, which is bracing for yet another subdued GDP growth, with a forecasted of 4.6% to 4.7% in Q3FY20 compared to 4.5% in Q2. From the 49 companies, 12 were above expectation, 12 inline and 25 below expectation. The number looks good due to strong bounce in NBFCs and Bank with net profit growth though asset quality and provisioning that was higher than expected, FMCG also did well.
Regarding Trump’s visit, the market was hoping for some positive developments, like trade deal in the future, which would open-up more perks for US-India trade. Though there were no conclusive discussions on trade tariffs, it is still expected that both the countries are in positive negotiations and will have a better deal by the end of the year. It will be positive for IT, Pharma, Defence and Agriculture sectors.

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