There is a lot of uncertainty prevalent in the financial markets since the breakout of the COVID-19 pandemic. The NIFTY plunged from its highest of 12,362 on 14 Jan 20 to 7,610 on 23 Mar, a drop of almost 38%. In India, large-scale lockdowns severely hit private consumption and economic growth slowed to 4.2% in FY 2019-20 with GDP growth falling in Q4 to an 11-year low of 3.1%. World Bank projects a contraction by 3.2% in FY 2020-21 when the country will feel the full impact of COVID-19. There are about 8 out of 10 workers self-employed in the country and the large-scale migration of the labourers further complicated the economic situation. The financial markets fell in May following the emergence of tensions between the US and China and rise in COVID-19 infections. The rupee continued to depreciate against the dollar and the key factor attributing to the fall was the large outflow of FII funds from equity and debt markets. The SENSEX advance/decline ratio in Jan was 1.16 with 1,579 securities advancing as against 1,356 declines. It went down to a low of 0.69 in Mar with only 1,139 advances as against 1,657 declines. However, it has again surged to 1.67 in Jun with 1,851 advances as against 1,111 declines. The recent decline in AUM of mutual fund asset management companies has completely wiped out the growth in AUM over the previous fiscal year. The fall in the number of schemes has resulted in an overall decline in the average AUM of these schemes from ₹27.9 lakh crore on Jan 20 to ₹ 23.9lakh crore on Apr 20, partially due to the exponential rise of COVID-19 cases and a total number of fatalities in India.
The government infused fiscal support program, adding up to ~10% of GDP, into a battered economy revolving around the theme of ‘Atmanirbhar Bharat’ or self-reliant India. In a mix of measures broadly categorized into financial spending, monetary measures, and long-term reforms it helped to generate more MNGERA employment and boosted tractor sales indicating a faster recovery in rural markets than urban areas, which continues to face labour and consumption issues. India’s energy consumption on 26 May 20 was 3775 million units, against 4,091 million units, about 7.7% less than 24 May 19. However, with India slowly opening for business, factories manufacturing, trains running and domestic airline resuming operations this demand is slowly getting back to its pre-lockdown levels. Financial markets show that FPI investors returned to the domestic markets by investing ₹ 14,500 crores during the month of May. Domestic investors used the corrections to add to their holdings. Net inflows in mutual funds jumped up into the positive territory after a continuous decline over the previous two months to end with ₹ 46,000 crore net investment over Apr 20 due to partial recovery in the global securities market. The AUM of mutual fund asset management companies rose to 24.5 lakh crore on May 20. On a positive note, Nifty climbed back to 10,300 level having reclaimed 35.3% from its 23 Mar low of 7,610. The Nifty PE ratio that fell to 20.38 in Apr from its high of 27.96 in Jan has again gone up to 24.16 in Jun. Fixed income markets too rallied as global central banks stepped up policy measures through rate cuts and asset purchasing programs to cushion the economic shock from the coronavirus pandemic.
With all this, we forecast that markets will stay volatile in the current financial year and Nifty will be around 10,500 by the end of the current financial year. Investors can expect a correction if a second wave of the pandemic hits the country or the corporate shows dismal Q1 results in the current fiscal year. Equity market valuations are broadly reasonable, adjusted for the cyclical low in earnings, and have the potential for revival going forward. Thus, we remain bullish on equities from medium to long-term perspective. Our advice to clients is to continue their systematic investments during this financial year and top-upon dips. However, they must allocate their assets as per their risk appetite and future financial goals. Fixed Income investors may continue to prefer high credit quality with short duration and remain diversified in their portfolios.