A forward looking
market opts to discount cash handouts over reforms whose benefits are not
immediately visible
·
There are two popular assumptions about equity
investing. The market knows best and the market is forward looking. Re-rating
or de-rating of sectors and stocks hinge on how current events will influence
the outlook. Like everything else, the covid-19 pandemic has raised doubts
about these perceptions. The issue is how much the market knows and what it
knows. The Dow Jones Industrial Average
index shed 4.45% on 23 March as US law makers failed to agree on a US$2.2-trillion
stimulus. It would have handed out one-time amount of US$1200 per adult and US$
500 per child for those earning up to US$75000 annually. The Federal Reserve’s
assurance that it will buy unlimited treasury bonds and mortgage-backed
securities to keep borrowing costs at near zero had no effect. The benchmark
gained 11%, the most since 1933, the next day as a deal appeared in sight. Not
only was the one-day loss recovered but the net asset value of the portfolio
more than doubled. Cash in hand was assigned higher weight over no-cost funds.
Liquidity can be deployed instantly. Capital takes time to ripen and harvest.
The prospect of immediate consumption appeared tantalizing than demand
coming after a lag. The expected flow to
service utility bills, mortgages and credit card loans and buying foodstuff
held more appeal than splurging on consumer durables by availing of
interest-free loan. Besides, the home confinement put in place hardly allowed
any scope for discretionary spends. Going by the US market’s behavior, the
lukewarm response to India’s second fiscal stimulus should not be a surprise.
The Nifty slipped 3.4% the day after the last of the five tranches, annoyed
with the absence of direct cash transfer.
The thrust of the first Rs
1.7-lakh-crore fiscal package on 26 March was to put money in the hands of
farmers and urban and rural poor. The over Rs11-lakh-crore second set of
measures turned on the liquidity tap, eased doing business and opened up the
economy. The indifference was not due to dispute about their necessity but
because the impact would not be visible immediately. In the pre-covid-19 era,
the market might even have heralded them as taking forward the reforms process
to its logical conclusion. If the forecast of good rains could propel the
mainline indicator 9.5% in a fortnight, so should have the massive hike in the rural
employment scheme outlay by Rs 40000 crore to Rs 1 lakh crore in the current
financial year. The other numbers are equally impressive: Rs 2 lakh crore of
concessional credit to PM Kisan recipients of Rs 6000 per year, emergency working capital funding of Rs 30000 crore to farmers over and above the
annual allocation of Rs 90000 crore and Rs 25000-crore refinancing credit line
to agriculture-focused cooperative banks and micro finance institutions. The scrapping
of the Essential Commodities Act will allow farmers to bypass wholesalers to sell
their produce at competitive prices. Taken together, these components
should boost village income. Instead, the NSE FMCG index lost over 5%, with HUL
dropping 20%, from their recent highs five weeks ago. That tractor maker
Escorts and fertilizer manufacturers Coromandel, Chambal Fertilizers, Zuari
Agro Chemicals and Deepak Fertilizers outperformed the market from their 23-24
March lows in the run-up to a normal southwest monsoon suggests that, when it
comes to making a choice, investors prefer stocks on intravenous drip rather
than benefiting from a long-drawn therapy.
The languishing bank and NBFC
stocks reaffirm how temporary setbacks overwhelm a promising outlook.
Dismantling the entry barriers of all industries is indeed a bold decision. The
banking space is likely to have just four PSEs.
Banks will invest up to Rs 30000 crore in investment-grade paper of
NBFCs. The Union government is offering full cover for lending to MSMEs and up to 20%
of the first loss on loans given by banks to NBFCs. In addition, the central bank is deploying
1.50 lakh crore to buy long-term debt of NBFCs. The market,
however, fretted about the potential deterioration in the asset quality of
banks and NBFCs because of the increase in the minimum threshold to initiate insolvency
proceedings, suspension of new bankruptcies up to one year, exclusion of
covid-19-related debt from the definition of default and higher provisioning of
10% on all standard accounts
permitted to defer repayment of installments. The 90-day waiting norm to declare
an asset non-performing will kick in only after a moratorium of six months. The
Nifty Bank and the Financial Services indices bagged the dubious distinction of
under-performing even the auto and real estate indices over the past month.
-Mohan Sule
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