Equity Market Update May 2021

We hope that everyone is keeping safe and your family is well protected. Taking safety measures and good care of our health should be our number one priority.

With regard to the share markets, several observers are surprised that the Indian markets have not fallen more during the devastating Covid second wave. The Nifty 50 closed at 14823 levels over the weekend. This is very similar to the 1^stApril levels. Last year, when the covid news came in March, the markets had a steep drop. But this year, there has hardly been any reaction till date.

While it is foolhardy, to predict how the market will move going forward, let us look at some of the reasons why the market has held on to the current levels

Key Economic and Corporate Trends

• Large Corporates have shown resilience and are better prepared this year – In 2020-21, despite 3 months of lockdown, the leading companies came back strongly. They have done intense cost cutting and are also planning ahead this time. The corporate earnings have been very resilient. The expectation is that this year also there will be rebound over the entire year, with companies making up for earnings over the course of the year
• Select sectors are seeing strong demand – Some of the industries like Technology (record hiring is happening), Pharma (increased healthcare spends), Specialty chemicals (driven by need for alternate sources to China), Metals (strong global demand has driven up metal prices significantly) are seeing very strong demand and have good earnings visibility
• Decisive Central Bank support – The RBI has been a very pro-active regulator. Earlier this month, they announced a series of additional measures including support to small financial institutions, guidance around restructuring, clear purchase of government bonds etc.
• Strong Global Recovery – The global economy is seeing a strong recovery simultaneously in USA, Europe and China. The numbers are very strong and is in fact fueling the commodity price rise. Export oriented companies are benefiting from this global tailwind
• Current lockdowns will be localized and temporary – Unlike last year, where there was a sudden, nationwide lockdown for months this year the lockdown has been done in a phased manner across states. There is no nationwide lockdown. The markets are currently taking a view that such lockdowns will be temporary and will help to contain the second wave
• Pace of Vaccination will pick up – As per the current projections, the pace of vaccinations for both existing vaccines as well as the new ones (e.g., Sputnik) will pick up over the next few months. Globally, countries which have been able to vaccinate large number of people have been able to contain the crisis

Key Risks Going forward

This does not mean that everything is hunky dory with the economy. There are some key economic and healthcare related challenges

• Arresting the second wave and rapid vaccination is needed – The key to economic recovery would be to stem the second Covid wave and also do rapid vaccination. Any further delays in the vaccination rollout would have social, health and economic impacts
• Pressure on government finances – Due to the unprecedented crisis last year, the fiscal deficit had ballooned. The economic rebound from Jan to March 21 had just begun with the government GST collections touching a record 1.41 lakh crores in April. There is no doubt that the current quarter will again see a steep fall. This will put pressure on finances and combined with the high commodity prices overall inflation may increase

What we should be doing now

Equity investments should be made for the long term, keep our key goals in mind. While as a country, we face a healthcare challenge, we have also demonstrated remarkable resilience to rebound in the past.

We should continue to invest in several world class companies, which have proven their ability to grow across market cycles. Plus, today, we have the opportunity to invest globally in high quality companies and we should take advantage of the same through overseas funds.

While we cannot predict short term market movements, over the long-term Indian equities are well poised to deliver inflation beating returns. Staying the course, keeping our asset allocation and liquidity needs will give us good returns. Stay safe !!