Equities brace up for more pain this month
A 6% decline in benchmark indices in May indicates that the 14% rally in April was overdone
MUMBAI: April was the best performing month in 11 years for Indian stocks, underscoring the growing disconnect between the stock markets and the real economy battered by the novel coronavirus pandemic that is showing little signs of abating.
The more than 14% rally in shares in April was overdone, according to some experts who cautioned that a 6% decline in May so far is an indication that more pain may be in store.
They said that in mirroring global peers, which are flush with liquidity thanks to a host of stimulus measures, stock markets in India have run ahead of themselves even as they take cues from developments on drug discoveries for a potential cure for the respiratory infection.
Market watchers maintain the biggest gain for the markets has clearly come from the liquidity thrust in advanced economies of the US, Europe and Asia, even though India’s own approach to stimulus has been distant with limited impact and is rather minuscule compared with the scale and size of liquidity boosting measures of many other countries.
“That said, India is still one of the worst-performing markets among emerging markets. So, any pullback in global markets will likely negatively impact our market as fundamentally nothing has changed since the first initial fiscal package and mid- and small-sized businesses are strapped of cash-flow, which in turn is now negatively impacting the whole financial sector,” said Andrew Holland, chief executive of Avendus Capital Public Markets Alternate Strategies.
To be sure, Indian stock markets slumped 40% in March from record highs touched in January post which foreign institutional investors (FII) sold equities and debt totalling $15.95 billion. On the currency front, the rupee is one of the worst performers in Asia. In 2020, the rupee has weakened 5.52% against the dollar.
“Investment case for India has weakened given its limited ability to provide significant stimulus without impacting credit rating and India’s higher dependence on the unorganised work force. The earnings season will see material cuts, especially in the financial sector,” said Credit Suisse.