We are going through one of the worst health crises in a century which is taking a toll on the economy. Going ahead, what is the trajectory you see for the equity market and returns from equity?
Markets don’t like uncertainty and hence undergo a correction. At this point in time, it is difficult to estimate how much the corona virus infections would spread and by when we will return to business as usual. Most market participants are struggling to price in the impact on the earnings’ growth of companies. The uncertainty has led to fear and ultimately to a sharp selloff. Once the contagion rate (the pace of infection spreading) reduces and the recovery rate (patient discharges from hospitals) improves, investors will be able to forecast the end of the pandemic and price the companies with a much clearer view of the impact.
What explains the huge disconnect between the economy and the equity market that we are witnessing in present times?
Over a longer term, the large-cap indices of Nifty and Sensex will have a better correlation with earnings’ growth rather than GDP growth. Once the virus cases started rising in the country and the government decided to go for a lockdown, the earnings’ growth estimates of India Inc. were revised down sharply and the indices also responded with a sharp correction. While FY21 earnings are significantly impacted, we expect FY22 to show some recovery. The broader market, mainly the mid-cap and the small-cap space, is significantly lower than the December 2017 peak, reflecting a slowdown in the economy. Going forward, the market will adjust the timelines for economic recovery based on the news flow related to the virus vaccine.
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