The markets rise suggests investors are ignoring the 'tail risk' of the pandemic

The Mint
June 21, 2020
Posted by Clifford Alvares

  • Most of the small and mid-caps are showing the huge impact of the pandemic on their scrawny figures as the coming two quarters will be washouts
  • Investors should be circumspect on some of companies where cashflows are low


For the stock markets, next week will mark the expiry of the June series derivative contracts. The expiry will provide how much of the sentiment will stay on the positive side after reopening the economy. Stocks are building some momentum on the upside as investors have started to look at how much earnings can be recovered.

One can see that the clash at the at the Indo-China border was quickly put behind. The grim economic news coming from the US is also now on the backburner. But then sentiments may be running a bit ahead of the economic reality. The run-up in the small and mid-cap stocks are a case in the point. The the BSE Small Cap index gained about 3.7% compared to the 2.8% gains of the Sensex last week. While the economic re-opening is certainly good news for many companies, most companies seem to be rallying on speculation rather than profit growth.

After all, most of the small and mid-caps are showing the huge impact of the pandemic on their scrawny figures as the coming two quarters will be washouts. Investors should be circumspect on some of companies where cashflows are low. Nevertheless, continuous inflows into the markets can keep the optimism levels going for a long time. Globally, the combined stimulus across the world exceeds $18 trillion, which is about 21% of global GDP. But for some companies like Reliance Industries Ltd, the race has been all about lowering debt. The firm alone added about ₹1.1 trillion in market capitalisation last week, which is about 20% of the total market cap addition among Sensex stocks. The company said that it had become net-debt free after a record fund raising in Jio Platforms. Of course, some of the cash has yet to come in, such as from the rights issue, but that has not deterred the stock from racing higher and making fresh all-time highs during the covid-19 times.

For companies such as LIC Housing Finance, the realty sector is showing signs of weakening; besides, dud loans are rising. The covid-19 pandemic is also likely to play spoilsport with the recovery of some companies such as Pidilite Industries Ltd. And for companies such as Shoppers Stop, the pandemic shows how tough it is to be a retailer. Nevertheless, there are some companies that have managed much better results. Muthoot Finance’s gold loan business seems to have perked up even in covid-riddled times.

Activity in the spot electricity market is also improving on the back of falling electricity prices. That is seeing Indian Energy Exchange business gaining traction in recent times. For pharmaceutical companies, demand for drugs has been bolstering business growth. IPCA’s domestic market business has improved in the last quarter, and there are signs that it could do better in the coming quarter.  But the economy has still a long way to go to recover. The WPI, which is a good measure of pricing power, shows that deflation continues to dog the economy, and provides early warning signs to policy-framers. That said, the markets are deep in overvalued territory. A Bank of America Global Fund Manager Survey says that about 78% of global fund managers see markets as the most overvalued since 1998. Besides, the ‘tail risk’ to the markets from the rising number of cases of the deadly covid-19 is not yet behind. Around 49% of fund managers still think that a second tsunami of infection could batter the markets.

Also, Indian equities are hovering near the overvalued zone. On its past earnings, the Nifty 50 is priced at about 21 times earnings. Besides, there’s an unprecedented downward pressure on earnings due to the pandemic. So, investors may find valuations less comforting even as sentiments rule for now.


Comments

Post a Comment

Popular posts from this blog

India Joins Russia in Voting Against West-Backed Move to Expand Powers of OPCW

The Wire: June 28, 2018 New Delhi: India voted against a UK-backed move that will allow the global chemical weapons watchdog to apportion blame for illegal attacks, criticising the decision to grant “unchecked powers” to the head of the group which could be used for “partisan” purposes. On Wednesday, more than two-thirds of the member states of the Organisation for the Prohibition of Chemical Weapons (OPCW) voted to authorise the international body to identify the perpetrators and sponsors of a chemical weapons attack. It also specifically called on the OPCW’s technical secretariat to begin work on identifying the perpetrators behind the use of chemical weapons in Syria. The draft decision, sponsored by 30 countries, was adopted at the fourth special session of the conference of the states parties to the Chemical Weapons Convention at the Hague, with 82 in favour and 24 negative votes. While Europe, the United States and their allies voted ‘yes’, there was strong oppo...
Read more

As financial insecurity rises in urban India, so does investment in insurance

Image
Scroll.in March 13, 2020 Urban Indians are becoming less confident about their financial security. Up to 58% of them fret over financial independence post retirement, which is a 4% increase from last year. An equal share of urban Indians worry about meeting their daily medical expenses and sustaining their current lifestyle once they stop working. The findings are part of a survey published by Delhi-based Max Life Insurance in association with London-based consultancy Kantar. The firms surveyed 7,014 respondents in 25 cities, including six metros, nine tier-1 cities, and 10 tier-2 cities, between December 2019 and January 2020. Source: Max Life Insurance via Quartz The trends Source: Max Life Insurance via Quartz Source: Max Life Insurance via Quartz Source: Max Life Insurance via Quartz A significant share of urban Indians also say their families will have no financial support in the event of the breadwinner’s death. In such a scenario, around 57% believe the family sav...
Read more

ED tracks Swiss Bank A/Cs of Agusta scamster

The Poineer February 10,2019 Rakesh K Singh The Enforcement Directorate (ED) has tracked a dozen Swiss bank accounts in the name of Rajiv Saxena, who is key accused in the Rs 3,600 crore AgustaWestland VVIP chopper scam. The ED has also found out accounts held by  his family members and associates where the kickbacks in the now scrapped deal were allegedly parked. Two bank accounts are in the name of Rajiv Saxena’s  associates Pankaj Jain and Sumita Jain who are also the authorised signatories. The  third is in the name of another associate Ajit Singh Bubber, but Rajiv and his family members are authorised signatories. The remaining nine accounts are largely owned and operated by Rajiv, his family members and associates. Rajiv Saxena was deported by the UAE authorities on January 30 and the ED formally arrested him the next day and a court later granted his remand to the agency. He is currently undergoing custodial interrogation by the ED. The agency had in 2017...
Read more