Tilting the balance: CIO’s Desk July 2020 from Tata Mutual Fund
As we approach market levels which are now only 10% below the pre-Covid levels, there are questions which this newsletter seeks to answer apart from making sense of what has happened so far in the markets. While the consensus view in the market was cautious (including ours), the incremental positive news flow (listed below) along with liquidity (global + retail) tilted the balance towards a steady climb over the last two months.
First let us look at the negatives (because it is much easier to do so).
1. The rate of infection continues to climb with positive test rates steadily inched up. This is true for US too post lockdown removals. Infact, from the negligible levels in March-20 (when the markets witnessed sharp correction), the present daily infection rate of 25-28k would have appeared quite ominous.
2. Staggered lockdown removal along with some reversals in large cities
3. The Nifty EPS for FY22 has been 15% so far with the risk of another 5% cut given lack of fiscal stimulus and staggered lockdown removal (ignoring the “extraordinary” nature of FY21 losses)
4. Demand across industries is back at 70-90% of pre-Covid levels but the real picture will emerge in Aug-Sep once the pent-up demand and restocking.
5. India’s valuation premium to other EMs which had declined to 20% in March is now at average level of 35-40%. So, there is less room for outperformance and correlation with global markets will be high (either way)
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