The month of October was a choppy one for the markets where initially we saw the frenzied move continue before markets gave up some gains by the end of the month. Overall markets still ended up by 3.6% as far as the Nifty goes. However the Midcap Indices ended flat with no gains or losses. The correction in the global markets was much more severe with most global markets selling off by 8-15% driven by uncertainty on the Economic growth front as well as risks associated with the second wave of Covid-19 which is now reaching devastating proportions in many parts of Europe and also spiking up substantially in the USA. The risk of another round of lockdowns is that most governments have used a large part of their firepower in the first round and monetary policy has almost reached its maximum in terms of creating a downside for economic growth. Fiscal Stimulus has already been huge in many economies and from here on might be more moderate. Most large economies are now at a Debt to GDP of over 100% which carries its own risks for the future unless growth picks up substantially.
In the Indian context the results season has been supportive of the markets with good results from sectors like Technology and Cement specifically. Results were mixed from the financials although it is tough to decipher the results in the absence of actual provisions which have been held back due to the SC ruling on not putting loans as NPA’s. Results from consumer stocks have been mixed as have been from the Auto Sector. The hallmark of the results season has been that many companies have resorted to strong cost cutting measures which have boosted profits even as overall growth has been subdued. This might not be sustainable over the long run. From an overall economy standpoint if companies cut costs then the overall economy is hurt at some level either in the employee income cycle, advertisement, promotions etc.
Fiscal Deficit data out end of the month also showed that government expenditure has been flat for the first half reflecting no fiscal stimulus as against the significant announcements that have been made. The key for the performance of the stock markets and the economy from here on now will be all about how much of the demand conditions we see today are pent up demand related and how much is a sustainable long term trend. Most companies are very uncertain about the future and demand sustenance beyond the festival season. Many people have used their savings to consume in the downturn even as job and salary losses have been significant. The one good part about a country like India is that monetary policy does work in stimulating demand unlike in many western economies and Japan where low rates for long have reduced the effectiveness of monetary policy in reviving growth.
GDP growth has several components. Personal Consumption is one of them which has revived decently. The other parts are government expenditure and corporate sector fixed asset creation both of which are subdued and likely to remain so for the foreseeable future. As such a sustained rise or growth of GDP beyond the revival from extremely depressed levels looks unlikely. This also doesn’t get any support from the hazy global growth outlook.
The Indian Market valuations are today almost 2 Standard Deviation about long term averages assuming a Rs 560 EPS for the Nifty for next year which is an aggressive projection. For those who understand statistics this essentially means that there is only a 5% probability that we will see any significant upside in the short run. What could disprove this is a much faster growth and earnings revival even beyond the assumption of a strong earning growth next year. The good part is that interest rates will remain low for longer and thus provide opportunities to pick out contrarian bets. We need to invest in only a few good stocks and that is possible.
The event risk of the US Presidential Elections is just a few days later and I will write more on that after the event.