LOCKDOWN DIARIES- DAY 23 PULL BACK RALLY STALLS

Over the last three days the Stock Markets have tried to stage a rally but the rally has stalled in most countries as the severity of the economic impact has started to set in. One of the major reasons that the markets need to give up some gains is because the pull back rallies have been so sharp and big that without a correction of the pullback the markets will not be healthy. There have been several developments over the last 3-4 days. I could not get much to write everyday so am writing after a 4 day gap.

  1. Covid spread around the world seems to be stalling with many of the earlier impacted countries like Iran, Italy, Spain and Germany now seeing a reversal in trends where in many of the countries the net increase every day has either decelerated or started to decline. South Korea has controlled the spread superbly and that also got reflected in their elections where the current ruling party got elected by a overwhelming majority
  2. Spread in India is very difficult to call as it has been not followed the trend of many countries of a continued increase in cases and then a decline. Cases spiked up three days back and after that we have seen a decline over the last two days. There are significant pockets of positives like Kerala where net cases have been continuously declining every day, Odisa where there was no case detected over 1200 tests yesterday, Delhi which reported just 17 cases and 5 net increase yesterday. However areas of concern remain Maharashtra and Madhya Pradesh. However overall the situation seems to be in control at this stage.
  3. The other major event which happened over the last three days was the announcement of partial opening up of the economy from the 20th of April . The guidelines are quite detailed and to that extent there should be some positive impact on the economy. However the main issue will remain consumption. Just opening up manufacturing when the entire consumption chain is shut down will have less impact. However it’s the first step. From 3rd of May the opening up should be a reality across most parts and then we should see more normalcy come through
  4. From the stock markets perspective we have seen globally markets settle and rally as the impact of various central banks and governments in terms of stimulus have arrested the decline. However given the strength of the pull back rally and the fact that a large part of these measures have already been announced we should see some give up of gains over the next few days as people realize that the economic impact is actually severe and companies also come out with their results
  5. Many large US Banks have reported results. The key is that many of them have reported huge writeoffs due to potential losses but have still been in profits which is a good thing and capital adequacy is quite strong. This is one big difference from 2008
  6. In the Indian Context the Finance Ministry has refused to come out with any stimulus package and this has started to have a real impact on wages and employment. All of us have seen the chaos related to migrant workers that is happening all around the country. We have also seen many companies announce salary cuts and there are others who are actually letting go of employees and cutting salaries without announcing. In Tour and Travel the impact is on several crore people, hotels and restaurants employ or support a couple of crore people. Many of these businesses might be irretrievably impacted the more the government delays the stimulus. Somehow there seems to be a thinking that things will self heal. Not this time.
  7. Like most other large economies the return to the GDP which existed two months back might take as long as two years now and that too after a significant fiscal stimulus. If the Government believes that they don’t need to do this then it could take 3 years also
  8. In the markets we have seen a huge rally in pharmaceutical and FMCG stocks. My view also was that select pharma will do well and the first leg of recovery will be in FMCG as those products are essentials that people need to consume. However many of those stocks are now near 52 week or all time highs. This is not sustainable as there is a real impact on their growth too. Right now due to fear there is a disproportional allocation to these stocks but even these should give up some gains
  9. The RBI also has not spoken after the MPC meeting. It is important to have a continuous conversation with the markets which both Finance Ministry and RBI seem to be avoiding. RBI needs to take out bets against its policy. 10 year bond yields have actually risen after the MPC decision and spreads of bonds of states and corporates have actually increased. They need to come out and do open ended OMO’s till the 10 year bond yield cracks to 5.75% this will ensure proper monetary transmission.
  10. Amidst all of this a recent Bank of America ML survey has indicated very high cash positions and very low equity allocations by global fund managers. This is lower than March 2009. This is a contrarian indicator for bottom formation

OVERALL I believe that we are not at a stage where different countries will start decoupling to some extent on the way their markets are doing. Markets like South Korea and China where normalcy is returning faster could do better. Germany which is planning to open up sooner might do better etc. March lows should hold but we should see another round of correction which seems to have started now and could end over the next couple of weeks. Those who missed buying near the March lows will get an opportunity to buy into stocks which will benefit from any economic upturn.

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