Under the fear of an economic recession

India’s GDP further slowed down to 4.7% in Q3FY20 from 5.6% in Q1 and 5.1% in Q2. The market had a view that domestic economy will recover from Q4 onwards due to improvement in global economy and stability seen in the domestic market which was supported by government stimulus and industrial sops. On a healthy note, GST income increased above Rs1 lakh crore in the last 4 consecutive month with an average of Rs1.06 lakh crore from Rs0.98 lakh crore a year back. Purchasing Manufacturing Index improved to 8 year high at 55.3 in January 2020 due to notable increase in jobs and consumption demand. All India electricity demand increased by 3.5% and Cargo traffic in major ports grew by 2.2% on a YoY basis in January 2020.

But since Feb, we are seeing drop in economic activities due to coronavirus issue. The anticipated recovery may spill by one to two quarter as per the development in the situation. India PMI in February declined to 54.5 due to brakes in manufacturing led by slowdown in exports and supply chain. The third quarter ended in December, total corporate sales reduced by -1% which is the second consecutive quarter from -3% in September 2019. The wholesale price index during the respective period was around 1%, factoring which, the real growth will be more negative. It is understood that the impact was more on non-financial sector with lower volumes and prices. This scenario is expected to continue especially for those sectors dealing with international markets like Metals, Oil, and export and import businesses. Some reports are forecasting an impact of 0.2% in Q4 India GDP with higher impact on Electronics, Pharma and Auto. IMF had cut world GDP forecast by 0.1% which may be updated to lower level in the future based on the on-going development.

Two weeks’ ago the US market was at a new high with an assumption that growth in US will not be impacted much due to China’s coronovirus issue. But as coronocirus started spreading to the rest of the world, the world’s largest economy and investor corrected by 12% (S&P500) as international transportation and supply chain got cut. As a surprise, Fed has cut the US interest rate by 50 points to 1.25% from 1.75%, this week, which is the first emergency decision after 2008 crisis. In spite of this positive development, the US equity market is on a negative boundary due to concern that whether US economy is under more pressure than being thought earlier. Australia has also cut the rate, and RBI is also expected to do so with a 25bps in spite of high CPI. Since prices are expected to consolidate due to further slowdown in domestic economy.

The qualified view is that corona is not deadly with fatality rate of 2% compared to higher seen in other cases. Pandemic has happened due to easily transmittable with high incumbency period. This issue will be contained well in the next 2 to 3 months. And economy will reverse to normality which is creating investment opportunity. Having said that, we should also note that many stocks are underperforming and reached to 52 week lows. Please don’t conclude that this is a large opportunity to make money. Since many of these stocks may be under pressure due to other issue like company specific, industry and promoter problems. It is advisable to look into the fundamental problems and understand whether these are opportunity or threat.