Making up for lost time

After being left out of the 2010s global equity boom, the Indian market does not want to miss Bull Run 2.0

27 July 2020

Equities have rebounded swiftly and strongly from the end March lows. There are enough clues to suggest it is a making of a V-shaped recovery rather than a dead cat bounce before the beginning of a bear phase. India missed participating in the over-decade-long bull-run enjoyed by the US, fuelled by near-zero interest rates and the six-year long US$4-trillion bond-buying by the US Federal Reserve after the collapse of Lehman Brothers in September 2008.  India was grappling with its demons. The Supreme Court in February 2012 cancelled the allotment of 2G spectrum, leading to a policy paralysis in the run-up to the Lok Sabha elections in May 2014. Coal block nominations, too, were held invalid in August 2014. Reserve Bank of India governor Raghuraman Rajan in December 2015 ordered banks to undertake asset quality review, with the threat of 5% provisioning for under-reporting. Lenders became risk-averse after they were told to keep aside 15% of their deposits, instead of 5%, for bad loans, whose classification was narrowed to 60-day default in servicing. The Real Estate Regulatory Act in May 2016 pushed the largely unorganised industry into turmoil, affecting demand for housing-related products including aluminium, steel and cement as well as for home loans. The recall of high-value notes in November 2016 and the bumpy transition to the goods and services tax era in July 2017 followed by the apex court in October 2018 ruling that the automobile sector had to transit to a new, fuel-efficient era from April 2020, slowed down private investment. The   collapse of infrastructure player and financier IL&FS in September triggered a liquidity crunch that lingered well into Q3 of FY 2020. Green shoots of recovery visible in January and February were nipped in March following the covid-19 outbreak.

In a strange coincidence, the Fed is mimicking its 12-year-old act as it scrambles to contain the damage to the economy from the pandemic. Interest rates are back to near zero. Bond-buying has resumed and will continue, at least well into the next year. The US government has provided US$ 5.5 billion of cash through two stimulus packages, in March and May. The stage has been set for Bull Run 2.0. In India, the overhang of the past disruptive measures has faded. The low corporate and individual tax rate regime has come into effect from the current financial year. The Rs 21-lakh fiscal and monetary support may be low on direct cash transfers but has opened up easy and cheap credit to the important components of the economy such as farmers, small and medium businesses and the home, auto and consumer durable buyers. The entire economy has been opened up. There has been no better time for risk-taking than now. The capital-raising being undertaken across the spectrum suggests that companies are feeling emboldened despite lack of revenue visibility. Not many are undertaking capital expenditure at this juncture. What is important is the confidence of issuers that money is available and the optimism of investors that it will be put to good use in the near future. The cash chest built at low interest rates will be an advantage when normalcy returns.

The readiness to part with funds is a useful guide to big-ticket investors’ calculations. RIL raised nearly Rs 2 lakh crore in less than two months from a clutch of foreign companies, equity funds, sovereign funds and internet properties to service the domestic digital and fuel markets, and not for exports. It suggests the bets are on India to regain its title as the fastest-growing economy in the world. That it will be the only major economy, excluding China, to record the lowest GDP de-growth in the current fiscal year points to, apart from a low base, resilience even in the most adverse environment. Right now, rural consumption is supporting the Old Economy and partially offsetting the absence of the urban buyer. It will not be surprising if Mukesh Ambani has used the presence of   Reliance Retail in tier 2 and lower centres to attract funds for the creation of a virtual marketplace that aims to replace the brick-and-mortar model. Only RIL can pull off this seemingly contradictory achievement. In the process, the buoyancy in the secondary market as India’s most valuable company turned debt-free has embraced sectors with physical assets such as automobiles, capital goods, infrastructure and commodities, positioning them to be beneficiaries when normalcy return. It is a welcome departure from the previous experience of demand drying up for all goods and services, save for the sluggish defensives, during a recession. A virtuous cycle is being created. Every secondary market rally will see renewed fund-raising in the primary market. The correction in listed stocks will afford an entry into reasonably valued counters.

-Mohan Sule