Cogencis, Tuesday, Apr 7

By Chiranjivi Chakraborty and Apoorva Choubey

MUMBAI – It is a sign of the times that the biggest one-day jump in the Nifty 50 and Sensex in nearly 11 years has drawn no fanfare from traders, asset managers or the government.

The near 9% surge in the benchmark indices today may indicate that the worst for equities may be behind for some time, but it has not altered the grim reality that the real economy and corporate earnings face.

To say for certain that markets will not go into a further tailspin, one needs some evidence that two things will happen, said Gary Dugan, advisor to Sanctum Global Wealth Management and chief executive officer of The Global CIO Office.

"Firstly, the rise in unemployment will have to prove transitory, and secondly, that the small and medium-sized enterprises will be saved from widespread destruction."

Both the parameters are indicators of demand in the economy and may not be forthcoming for some time leaving investors in the dark on the extent of damage the coronavirus pandemic has caused to livelihoods, to consumption, and to the economy.

Even if investors were able to gauge the quantum of demand that has vanished from the system due to stringent lockdown and social distancing norms to contain the coronavirus, not many are optimistic that a quick recovery is possible to revive the economy that may grow at its slowest pace in 30 years in 2020-21 (Apr-Mar).

"Waning demand can always be stoked back...but if demand is snuffed out then it is difficult to revive," said a Singapore-based asset manager.

Consumption has been the backbone of the Indian economy in the past 10 years, helped in large parts by easy credit made available by non-bank lenders that were eager to grow their businesses.

However, the shadow lending crisis of 2018 and the recent collapse of YES Bank have meant that the financial system is in no shape to give demand a leg-up. Companies like Bajaj Finance and banks like Kotak Mahindra Bank have already tightened lending norms to sacrifice growth for security of balance sheet in these unprecedented times.

"A large part of how markets react will be determined by what governments and central banks do after the lockdowns are lifted," said a city-based fund manager with 10 bln rupees in managed assets.

"They will have to be prudent in providing relief to stress groups and kick-starting economic activity."

That means direct cash transfers or replacement of wages by the government till job creation comes back to the economy, bail-out of small- and medium-scale businesses and critical industry like airlines and real estate.

This is assuming that the government's efforts to contain the pandemic are successful by Apr 14. If not, the economic situation of the average Indian will deteriorate further, said money managers.

"Emerging markets could be the next domino to fall, and we are keeping an extremely close eye there," said Scott Minerd, global chief investment officer at Guggenheim Investments, alluding to the recent rise in coronavirus cases in Latin America, South-East Asia and Africa.

The surge in indices today may provide some cause of fettered optimism for investors as it may be the signal that equities may have found their feet after a precipitous fall in the past three months.

But, those feet are on a shaky ground, which may crumble if the pandemic is more persistent.  End

Edited by Maheswaran Parameswaran