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Economies of the world got a major shock with the arrival of COVID-19 and the resulting lockdown. India’s GDP slumped to a record low, while the markets plunged. Now, when the lockdown has been lifted and businesses are starting to operate, the Sensex has responded positively. Economists believe that markets are in the phase of recovery which is currently on a bullish rally.
To understand the mood of the market and where to spend in these times, we spoke to Morgan Stanley’s Equity Research Head, Ridham Desai.
Why Are Markets So Bullish?
Markets are responding to the massive liquidity infusion by the governments across the world. The period of lockdown saw unprecedented coordination between the governments and central banks around the world. Such liquidity infusion has never been seen in the history of the world. It has surpassed the levels during the 2008 global financial crisis.
This liquidity has made its way into the asset market, whether it’s equity or gold, and it might reach the property market over time.
Are news about the COVID-19 vaccine and the US Elections driving the markets?
COVID remains the factor. The vaccine would take several months before it reaches the market. We might not have the vaccine reaching us by the end of 2021. In India, the weather is changing and pollution levels are increasing, if we aren’t careful, we might see a resurgence in COVID cases.
While I don’t expect a nationwide lockdown, we might see regional lockdowns, which bring retraction in the economic activity. If we look at the US and Europe, the cases have passed the previous peaks. I am not sure if India has an appetite to see another surge of 100 thousand cases a day.
The US presidential elections obviously have implications around how the policies evolve. The senate results are still not out so, we will have to see how the policy makers in the US respond to the outcome.
Advices for a new investor?
Investors should approach the equity markets with a healthy dose of skepticism. It’s not something that can be timed very easily. Trading the market does not yield good results. In fact, traders end up losing money which investors make.
The approach should be to systematically invest per month or quarter, depending on the leverage that your pocket gives.
Is rally going to sustain in the short term?
There will always be a fair amount of risk on the downside in the short as well as in the long run. There could be a policy error because somebody underestimated the impact of COVID, there could be another surge in the COVID that could cause economies around the world to stop... We do not know that.
As an investor what companies and sector to target?
Automobiles, travel, leisure, entertainment, and cement are really interesting. There was an undercurrent in the economy pre-COVID. It was very unfortunate for India that COVID came at a very wrong time, otherwise the June quarter could have produced India’s best growth rate in 10 years.
We should also not underestimate the potency of new farm laws which can lift the farmers in India. If that happens, the poorest of the poor in India might feel the buoyancy in their income, and they might be able to spend beyond the basic and essentials.
What does the government need to do?
There is a lot of work to be done. India needs to build infrastructure, it needs to fix the anomalies in GST, there is a direct tax reform impending, bureaucratic reforms are impending, there are potential changes in contract law. So, there is a fair bit of work to be done. I am witnessing a new-found enthusiasm to boost the economy.
How has India Inc. responded to COVID?
The pandemic response seems encouraging. Most companies have responded by rationalising the cost structure and not necessarily firing people unless they had weak balance sheets.
Many companies used this period as an opportunity to acquire businesses that had weakened. Some companies sold their non core businesses to strengthen their core business. Data shows that the corporate India has reacted in a very positive way.
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