A LOT OF BULL

Why the sharp recovery and sustained run in stock markets is built on weak fundamentals. Despite the fall, they are trading at double the valuation of the 2008 Lehman crash

Why the sharp recovery and sustained run in stock markets is built on weak fundamentals. Despite the fall, they are trading at double the valuation during the 2008 Lehman crash

Tight turns, steep slopes, sudden highs and inversions are characteristics of a roller coaster. Those have also been the hallmarks of the Indian stock markets for close to three months. From hitting a three-year low on March 23 with a 13 per cent fall to bouncing back just three days later, it has shown deep falls and sharp recoveries time and again.

But don’t get fooled by that. There may be a storm brewing beneath the calm. After all, this sharp recovery is built on weak corporate and economic fundamentals and huge uncertainty in the immediate future.

With India’s economy projected to shrink 6.8 per cent in FY21,

according to SBI Ecowrap (it grew slowest in 11 years at 3.1 per cent in the March quarter), early bird corporate results showing sharply shrinking top lines and bottom lines, stock markets are set to lose the only basis on which they have been rallying — the hope of a ‘ V’ shaped recovery.

The optimism is dimmed further by rising coronavirus cases in India and fear of a second wave in the US, the world’s largest economy, which has led to a selloff in S& P 500, the global barometer for equity markets, as well.

Add to this the lockdown-triggered defaults feared in housing, credit card, personal and corporate loans, their impact on non-performing assets ( NPAs) of banks and nonbanking finance companies ( NBFCs), and the stock market rally appears to be on a very, very weak wicket. “The economy is in shock. All indicators are showing that the situation is very bad. Fundamentals of the stock market story are very weak,” says Dhananjay

Sinha, Head of Research and Equity Strategist, Systematix Group.

Analysts say markets go through three-four stages when hit by an unknown factor such as coronavirus. “Covid-19 hit us in January from a China perspective. India started reacting to it the last. The first stage is extreme over-reaction as nobody knows what is happening. So, markets tumbled in March,” says Amit Shah, Head of India Equity Research, BNP Paribas. But, the government lockdown prompted markets to get out of the first phase of irrationality. Then, the second leg — recovery — began. “We remained in lockdown. This helped control spread of the virus and indicated, from the market’s perspective, that the worst is behind us,” Shah adds. But that was not to be. In June, the market is at stage three when people are beginning to look at fundamentals after stability has returned and are closely monitoring the spread of Covid in India, besides a potential second wave globally, he says. “The longer Covid stays, the slower will be the FY22 earnings recovery. The market is already looking at FY22 for cues.”

Sensex shed 3,935 points with a 13 per cent fall to 25,981 on March 23 with all its 30 stocks in the red. Just three days later, it bounced to 29,947 points. It had hit an all-time high of 42,063 on January 17. On May 18, it hit a low of 30,029 again, touched 34,370 on June 8, and on June 15, was at 33,605, up 29 per cent from March lows.

The Sensex rose nearly 5,000 points from May lows in less than three weeks. It fell nearly 5 per cent in five