Creating a bigger impact!

chief investment officer
AK Sridhar
Chief Investment Officer

Market Matters June 2020

Equity market indices rose sharply during the month. Market sentiments were lifted by the optimism surrounding opening of the economy post easing of the lockdown restrictions and the continued economic support provided by the government and central bank. Fixed income markets remained rangebound during the month.    

Domestically, geopolitical tensions rose as the Indo-China military stand- off continued along the Line of Actual Control (LAC) near Eastern Ladakh. Government also banned certain Chinese apps citing cybersecurity concerns. Government also initiated the process of ‘unlock down’ i.e. phase wise opening of the economy. Economic data viz., industrial production & manufacturing PMI continued to reflect the economic impact of pandemic outbreak. Trajectory of economic data continues to remain uncertain in the near term.

Markets rally over the past 3-4 years had been primarily driven by multiple expansion without accompanying earnings growth. Based on historical data (for domestic markets), PE ratios above 21x have always been considered as expensive and the markets had been hovering in that zone for past 3-4 years. COVID-19 has acted as a trigger for expensive valuations to correct and mean revert. Historically, post such a tectonic shift, new sectors typically emerge as market leaders. In the near term, growth revival would be contingent upon how the unlockdown progresses. Going ahead, the monsoon progress, trade war & geo political tensions, impact of the recent extraordinary policy response, reopening of supply chain linkages, corporate earnings trajectory / shock and crude / commodity price trajectory would be monitored.

Considering the risks and the uncertain economic growth trajectory in the medium term, market correction cannot be ruled out from current levels. Market volatility can be expected to rise but it can also provide attractive opportunities to accumulate quality stocks. A gradual increase in allocation towards equity can be considered with a 3 – 5 year perspective. Equity as an asset class has proven its ability to deliver superior returns in the long term.

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