Over the last one month, there hasn’t been a lot of good news for the country’s economy. Despite governments starting to ease the lockdown restrictions now, coronavirus cases continue to rise and the economy is expected to contract as much as five per cent this year. Yet, equity markets have seen some sort of a rally, gaining over 7.5 per cent in the last one month and 32 per cent since the low of 25,638.90 the Sensex hit on March 24.
THE WEEK caught up with Vinay Agrawal, CEO, Angel Broking, to understand what is driving the enthusiasm among stock market investors and how are things looking ahead. Excerpts:
Many ratings agencies, of late, expect India's economy to contract this year. Despite the bleak forecast, there hasn’t any sort of panic in equity markets. Why?
S&P pegs India’s growth in FY2021 at -5.0 per cent, predominantly due to sharp contraction in the first quarter. However, the economy should bottom out in Q1 and start recovering from the second quarter onwards, given that lockdown is being lifted from large parts of the country from June.
China, which was the epicenter of the outbreak initially, seems well on its way to an economic recovery which is reflected in high frequency economic data points like the manufacturing PMI numbers, now in an expansionary mode for three months in a row since March. Most European countries are also well on their way to opening up their economy while the COVID-19 outbreak seems well in control. Similarly, the peak of the COVID-19 outbreak seems to be behind for the US, which coupled with a USD 2.9 trillion monetary stimulus by the Federal Reserve, is leading to a risk on rally globally. This is providing tailwinds to Indian equities.
After the huge crash in March, equity markets saw a rebound. How do you see things panning out over the rest of 2020?
While Indian markets seem to be moving up in line with global markets, we believe that one should exercise a certain degree of caution as we may not be out of the woods yet, and the global recovery could suffer setbacks given escalating tensions between US and China, which may lead to another round of full blown trade war. Recent increase in new cases in India, which is coinciding with the opening up of the economy, is a cause for worry and could derail the recovery if the COVID-19 situation gets out of hand over the next month or so. So, while the outlook for the markets seems to be positive in the near term, there could be bouts of volatility later on.
How should investors approach the market in the current volatile times and uncertainty over economic outlook?
In the current volatile times, it is imperative to focus on diligent sector allocation. Ever since the beginning of the crisis, we had been recommending investors to focus on sectors, which are either engaged in essential activities or can benefit from digitisation. We have also been recommending our customers to avoid sectors where demand will be adversely impacted for a prolonged period of time due to the COVID-19 outbreak and wait for more clarity before investing in those sectors.
However, given that the economy is on a mend from here on, we have also started recommending buying into high quality beaten down names where valuations have become attractive and demand is expected to come back relatively sooner. While we have been sticking predominantly to high quality large caps as of now, we are also open to recommend buying into high quality mid cap stocks as the economy keeps improving and demand keeps coming back.
Do you think government stimulus did enough to boost demand and will the measures help in reviving the economy? What more is needed?
Though the government announced a Rs 20 lakh crore economic package, the lack of actual spending by the government was not appreciated by the markets, and hence the under performance by Indian equities relative to global markets in May 2020. The stimulus package focused more on credit than on actual cash spending. Cash transfers have an immediate effect on driving demand, which is the need of the hour for any economy.
We believe that the recent move by the government in terms of unlocking the economy meaningfully from June 2020 onwards is very positive as restrictions will be lifted significantly in most parts of the country, which should lead to increased economic activity from second quarter.
Due to the COVID-19 crisis, banks are likely to see a rise in non-performing assets. What's your view on the sector?
The banking and NBFC sector is expected to bear the brunt of the outbreak as the COVID-19 crisis is going to result in higher NPAs over the next 6-12 months. The sectors were just coming out of a protracted NPA cycle and the COVID-19 outbreak will further delay the recovery cycle for the sector. Markets have already factored in soft numbers over the next couple of quarters. We would recommend sticking to larger banks and financial institutions with high quality franchises as they are expected to come out of the crisis stronger while weaker lenders are expected to fall behind.
The government had ambitious divestment plans. Given the state of the global economy, how do you see the disinvestment programme panning out in FY21?
Disinvestment target for FY2021 at Rs 2,10,000 crore was a tough ask to start off in the first place against revised target of Rs 65,000 crore for FY2020. The probability of that being achieved in the current market environment is very slim. Therefore in all probability we are looking at a shortfall in disinvestments targets for FY2021 even if the government is able to push through the LIC IPO in the latter half of FY2021. Strategic sale of companies like Air India and BPCL would be difficult in the current market environment especially at valuations, which the government may want.
Mutual Fund data from last month shows investor appetite for equity funds has fallen. What needs to be done to attract investors, particularly retail, in volatile times like these?
While there has been some impact on equity flows given volatile market conditions, SIPs have held steady at over Rs 8,000 crore. We believe that the lower interest rates have increased the attractiveness of equities as an asset class and it is just a matter of time before investors realize it.
How has been the growth like for Angel Broking in these turbulent times?
During late-February, we reached out to tier II and tier III cities with a new initiative targeting millennial and tech-savvy investors and increased awareness around securities investment. We also highlighted the advantages of our Angel iTrade Prime platform, which involves a flat fee structure, zero charge for equity delivery orders, and value-added services and free personalised research.
By March, at Angel Broking, we started receiving over one lakh new customers. The trading volume also touched a new milestone of 20 lakh trades in a single day. In general, our trading activity has gone up by 50 per cent vis-à-vis pre-Covid period.
