Creating a bigger impact!

chief investment officer
AK Sridhar
Chief Investment Officer

Market Matters May 2020

Equity market indices remained volatile during the month. Market sentiments were lifted towards month end driven by optimism over the easing of the restrictions in place to contain the coronavirus outbreak and the economic relief measures taken by the government and central bank. Fixed income markets were buoyed by additional easing measures taken by RBI.

Domestically, the government extended the lockdown further to prevent the virus spread. It also announced an economic package, ‘Atmanirbhar Bharat Abhiyan’, to aid domestic demand revival. RBI cut policy rates further and extended moratorium on all term loans further. Economic data viz., economic growth, industrial production & manufacturing PMI have started reflecting the economic impact of pandemic outbreak. Trend of economic data continues to remain uncertain in the near term.

Global as well as domestic markets rally over the past 3-4 years was primarily driven by multiple expansion and without any meaningful 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. In the near term, growth revival would be contingent upon how the unlockdown pans out. Going ahead, the trade war & geo political tensions, impact of the extraordinary policy response, reopening of supply chain linkages, corporate earnings trajectory / shock and crude / commodity price trajectory would be monitored.

Since the economic growth trajectory remains uncertain 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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