Its the Viral Cycle Once Again!
Nowadays it’s quite common enough to come across headlines such as ‘Black Monday’, ‘Bloodbath on D-Street’ and ‘Investor’s Wealth Erodes in a Single Day of Market Crash’, etc. Meanwhile, news of an increasing number of fresh cases of corona virus in India has also become the grist for primetime news with cases mounting at a brisk pace in a span of just two weeks. India’s daily infection count has reached to over 2 lakhs from about 1 lakh cases. Moreover, what is a cause of grave concern is that many of these cases have been reported from the economically important centres of the country such as Mumbai and Delhi.
Mumbai already has declared stringent restrictions for the next 15 days to break the chain of transmission. And if the rate of surge in infection continues the way it is doing so now, other states too will follow suit. If this is what the grim picture is going to be in a few days from now, India’s growth prospects for FY22 appear to be darkening again as the sporadic lockdowns, mobility curbs and night curfews are likely to take a toll on economic activity. It is unbelievable that it was only a couple of weeks back when the International Monetary Fund (IMF) had hiked India’s GDP forecast 1 per cent higher as compared to its previous forecast in January 2021.
IMF in its World Economic Outlook April 2021 reported that India may post GDP growth of 12.5 per cent in 2021. Mind you, this was not a sole upgrade regarding GDP projection of India. A slew of rating agencies like Fitch, Standard and Poor and Moody too had upgraded their forecast. And such is the situation now that weeks later we are again staring at a repetition of last year. If the situation continues to be same as it is now and curbs continue to stretch beyond mid-May, don’t be surprised to see rating agencies beginning to cut down the growth forecasts.
Meanwhile, the much-awaited quarterly earnings have started to pour in and IT bellwether TCS and Infosys have announced their numbers. The data reported by these IT majors has been decent and the commentary for FY22 has been encouraging so far. However, the earnings did not tick as many of the boxes as expected since the market projections were rather high in terms of corporate performance. As a result, we have seen a correction in the IT index. This is where the actual problem lies. As quoted by Lou Simpson, Chairman, SQ Advisors, “Even the world’s greatest business is not a good investment if the price is too high.”
The problem is that the stock valuations have never been so stretched at the beginning of an economic cycle. IT stocks and many other stocks have rallied too far too fast so that everything looks extremely overvalued now. In all such scenarios, the IT sector has acted as a saviour both in the recent past as well as on other occasions. In fact, each time there has been negativity in the markets, the IT sector has pulled the markets out of the woods. However, with the best-case scenario already factored into the price, the IT sector may perhaps not be able to continue with its rescue act this time. We expect some corrections in the near term.
Another important point to observe is that Bank Nifty which showed some signs of revival on Tuesday, is still trading below its 100-DMA. This has definitely proved the adage that a single swallow does not make a summer. Talking about the trend, the markets continue to remain sideways as declining prices have been followed up with some pullback, and these pullbacks have been used either to liquidate long positions or initiate a fresh short position. Going ahead, the markets would like to see two things: first, the definitiveness of peaking of virus cases and second, how fast India would be able to vaccinate. Until and unless the markets get any clarity on the above two factors, it would be a wait and watch play.
