Stock markets are forward-looking. Indian equity market took a deep dive in 2020 and recovered swiftly to touch it’s all time high in early 2021. What’s surprising is the fact that stock prices continue to trade at higher valuations even as the fear of second wave looms us. The second wave in India has been severe than 2020. So how is this justified? Does this mean another crash awaits us soon? If it does, then why did equity markets did not foresee it ahead of time?
Well, the one thing that markets do not like is the ‘Uncertainty’. Back in 2020, the outbreak of pandemic had taken everybody to surprise. No economy had an idea how to tackle it. Today after over 12-15 months, we have number of vaccines with strong efficacies, we know the effectiveness of the lockdowns, we know the pattern of how the virus spreads and what precautions need to be taken. The roll out of vaccine, clears out a large part of the uncertainty. Simultaneous state level lockdowns along with massive countrywide vaccination drive are perceived as positive steps towards combating the pandemic. All these factors play an important role in clearing the air around the uncertainty. Thus, despite India experiencing second wave, optimism in recovery is intact thereby justifying elevated valuations.
Markets are headed towards the test of its time. The coming months will tell us whether the second wave hold its roots deeper, or India walk swiftly out of the pandemic. The daily cases have been spiraling sharply since the start of the April. As per Ministry of Health and Family Welfare, India became the only country to register more than 4,00,000 cases in a day on 1st May 2021. The rapid spread crippled our weak social infrastructure in the form of shortage of vaccines, hospital beds, oxygen and ventilators. The rising cases were followed by strict state level lockdowns which is expected to bring the numbers under control.
Nevertheless, a lot needs to be done to get us completely out of the second wave. Several aspects like building social infrastructure, faster testing, roll out of vaccines needs serious attention by Government. Indeed, we could have avoided the second wave with a little proactive approach in conducting rapid testing, restricting unnecessary movement of masses and rolling out faster inoculation of masses. India being a global supplier of vaccines can manage its inventory better to insure both country and the world gets vaccinated at the earliest.
In my view there is three key aspects that needs immediate government attention:
- Ensure strict lockdown in the hot spot areas to break the chain of the spread.
- Incremental spending on building social infrastructure. Increasing the capacities of hospital beds, ventilators, Oxygen capacities will help improve the recovery rate.
- Given India is predominantly a young country, vaccination of the youth/ bread winner should be the priority. This will eliminate any possibility of third wave.
If the above three aspects are taken care of, we can comfortably come out of the second wave without severe damage. What future holds for us is therefore a million-dollar question.
There can be three scenarios that can play out from here on. Let us try to understand each scenario and its enablers and deterrents. The optimistic scenario that could play out is that economic indicators surprise us on positive side and justify the present elevated market valuations. This however is unlikely given that we are currently lagging many countries with respect to inoculation of our masses. According to ourworldindata.org less than 9% & 2% of India’s population has been vaccinated with 1 dose and 2 doses respectively as on 23rd April 2021 as compared to 41% for United States, 49% for United Kingdom and 62% for Israel.
On the contrary, the pessimistic scenario that could play out is that economic indicators fail to deliver, and markets gets a reality check in the form of sharp correction. This may occur if we face a severe 2nd wave of pandemic leading to nationwide lockdown and the devil from the past starts haunting us again. In such a scenario Inflation will go for a toss as logistics will get crippled. Movement of people will get restricted hampering demand. Government revenue underperforms due to weaker recovery, corporate profit and underperformance on divestment targets. Government may come up with another fiscal stimulus which could further strain its balance sheet. All this, however, looks too stretched.
This is unlikely to occur because unlike last year we already have discovered the vaccine to the pandemic, we have a clear roadmap to vaccinate the masses at the earliest. A series of government measures (including stimulus) have either started showing results or have already led to recovery in various sectors. Quarterly results of Indian Inc for period ending December 2020 and March 2021 have surprised on positive side. The government has indicated that nationwide lockdown is not an option. Clearly the government does not seem to be in an uncharted territory like it was in 2020.
That leaves us with the most realistic scenario where macro-economic improves albeit in a slower pace compelling equity markets to consolidate. This means, economy improves, market rationalizes, and both find an equilibrium somewhere in between. The reason this could play out is because India is still not at the level it should be in terms of vaccination for the size of population it houses. We may take a while to vaccinate our masses. Additionally, the selective lockdown in several states will spread its dark clouds on our path to shine over the pandemic. High frequency data might give us Déjà vu moment. We may see GDP growth expectations getting revised in the downward direction. Already rating agencies like ICRA & CARE have cut India’s GDP estimates by 0.5% to 10.5% and 10.7% respectively. Crude prices have cooled off lately giving some respite to our trade finances. Seeds of regulatory interventions sown in previous year in the form of relaxation of norms, interest waivers, introduction of PLI scheme, recapitalisation etc. has started yielding results. Early signals of demand revival are visible in key sectors such as Real Estate, Auto and auto ancillary etc. It’s clear that recovery is happening albeit at a slower pace. But things are going to get complicated from hereon.
We have now formally entered the election season in May. Elections were conducted in 4 states in May 2021 and as much as 7 states will go for election in 2022. We might see economic policy and decision making to hit speed bumps as we enter the election phase.
It is for time to tell us where we would find ourselves in the future. Not to mention that we may even see a scenario, where equity valuations continue to wait indefinitely for macros to improve only to validate the famous say by economist John Maynard Keynes “Markets can remain irrational longer than you can remain solvent.”
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