The bear-rally is consolidating, the market will be range bound

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There is a downfall in the bear-rally, which is in-line with the expectation, as the market had rallied by more than 30% while fundamentals had not improved much. After hitting the 52 week low the market rallied in support of liquidity from central banks and governments. The negative factors impacting the market today are extension of domestic lockdown, worse than expected Q4FY20 results and concerns in global market about a new trade-war between US and China post the Covid issue. Our view regrading the extension of lockdown is that it is not a big negative surprise for the market since economy was expecting to reopen phase-wise post June 2020. The latest protocol seems largely in-line and the two week extension may not have any impact since the main thesis is intact. Of course, we have a risk that the thesis is in danger since some states and zones in India are planning to extend the lockdown post 17th May and many parts-of-world are still maintaining public distancing. As a result, the improvement of economy will not be in-line as forecasted from Q2FY21 onwards.

The domestic Q4FY20 results have been weak till date. The market has realized that the impact on revenue and bottom-line is much higher than thought, assuming that Covid-19 would not have much of an impact in Q4. Based on latest economic and corporate data, the market is concerned about the cascading effect on domestic economy and corporate earnings in the future, leading to further downgrade in outlook for Q1 and Q2 of FY21. Currently, global market is worried about deglobalization and new trade-war between US-China which will impact the economy further, with rising unemployment and possible bankruptcies in the future.

Currently, Indian banks are underperforming due to downgrade by credit agencies and analysts due to fall in credit growth and risk of new NPAs due to collapse in economy. The valuation of banks has not fallen in-line with the weak outlook. One factor which could provide relief to the market in the short-term is the size and effect of fiscal stimulus provided by the Indian government, which is expected.

One sector in India which is largely unaffected in-terms of outlook is Agriculture due to exemption from lockdown. Of course, there are sections of work which will be impacted like shortage of laborer, empty wholesale markets, and disruption in supply and demand. But given the essential nature of the work, supportive measures undertaken by central and state governments for rural market, it is a safe sector. According to the latest statistics, sowing of summer crops has grown 38% higher than last year. Water reservoirs are at higher level than last year and normal monsoon is forecasted this year. The central government is also in discussions to bring agricultural reforms in the future. This includes replacing archaic laws, reforming agri marketing, raising farm-gate prices and unifying domestic markets, please note these measures are not expected in the near-term. The outlook for the sector is positive in the short and long-term due to a combination of favorable weather conditions, sustained demand and reforms in the future. In terms of stocks, companies with large domestic presence and strong balance sheet in Agri-Inputs, Crop protection, Chemicals, Tractors and FMCG should be considered.

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