Stock Market Newsletter – May 2020

This time it was really different!  After a very rewarding April, May 2020 turned out to be different, relative to the previous 7 years. Of the 44 global indices, only 9 indices ended the month with negative returns and India was one of them, with Nifty50 registering a 2.84% decline, highest since May 2012. Of course, there was a ‘historic’ announcement related to the economic stimulus package, which boosted the sentiment in the interim, but the details were disappointing, as evident from the stock market response. Other highlights of the month include, India Inc declaring its fourth quarter results, government sharing an unenthusiastic GDP print along with other economic data, poor economic outlook by ratings agencies and the corona virus induced lockdown extension till May 31 2020.

Before discussing the various headlines, a look at where India stands on the Corona Virus pandemic front. As of Jun 3 2020, the numbers stand as indicated below. By the end of the month, confirmed cases started logging at more than 8000 in number consistently and on Jun 3 2020, recorded the highest number of cases at 9564. At the same time, recovery rates have been pretty high, at around 48%. Testing has increased across states and essential PPE manufacturing is in full swing, along with preparations for beds and ventilators at hospitals and treatment centers.

In the meanwhile, central government has provided relaxations in the green and orange zones, thereby opening up certain parts of the economy to regular business starting 8 Jun (barring containment zones). Industries and service segments across sectors commenced operations, but within guidelines of social distancing and cleaner environments. Let’s hope that, by the next newsletter, we would have seen declined of corona virus cases, at least to a decent extent.

Getting back to the performance of global indices for the month of May, Japanese and American stock markets performed splendidly, clocking well over 10% returns. Hongkong market ended with larger losses owing to the fallout from issues related to China.

While Nifty50 clocked negative returns, most of the sectoral indices ended with positive returns barring banking stocks – public and private alike. The best sectors of the month were auto and metals with decent performances from infrastructure, pharma and information technology. Nifty volatility index was down 10.7% for the month.

Unlike the previous months, in the cash segment (on a provisional basis), May looked optically better, with FII net equity purchases of Rs.13,914.49 cr., amply supported by DIIs at 12,293.19 cr. These positive flows can be attributed to the follow-on offerings totaling US$4.4 billion – a record for any month. GlaxoSmithKline’s US$3.3 billion sale of Hindustan Unilever’s stake and US$1.1 billion capital raising undertaken by Bharti Airtel accounted for most of the equity inflows.

In addition to these two offerings, Reliance Industries initiated a 53,000+ crore rights issue, which was subscribed ~1.3X with 2 days left to close of the offering. A great month for capital raising through various avenues, including non-convertible debentures by many companies.

After witnessing an increase of ~ Rs.16 lakh crore market capitalization of BSE listed companies in April, there was a minor drop of Rs.2.35 lakh crore in May.

The performance of Nifty was evident from the performance of its constituents. Among Nifty50 stocks, Bharti Infratel stood out with 41% return, followed by M&M at 25.4% and Hero MotoCorp with ~20%. Among the 15 losing stocks, 9 were from the banking and financial space.

In the USD-INR pair, the Indian Rupee depreciated from 75.08 to 75.61 against the US dollar.

These were the prominent highlights related to stock markets, currency and investment flows.

Moving on to Indian economy, Q4GDP was recorded at 3.1%, considerably higher than most analysts’ expectations. This was a result of reduction in GDP of the three earlier quarters. Q1GDP was revised to 5.2% from 5.6%, Q2GDP to 4.4% from 5.1%, Q3GDP to 4.1% from 4.7% earlier. This change pushed the Q4GDP from an expected 1.2% to 3.1%, thereby ending FY20 GDP growth at with 4.2%.

Provisional Estimates of National Income and Expenditures on GDP, 2019-20 (at 2011- 12 Prices) (Rs.crore)

Gross fiscal deficit came in 22% higher than revised estimates of February, due to a shortfall of Rs.1.8 lakh crore in revenue receipts. Instead of the revised 3.8%, fiscal deficit for FY20 ended at 4.6%, the highest in last seven years. A 7.8% fall in direct tax collections was the first contraction in the last 4 decades and GST collections were lackluster on an overall basis.

The expectations for Q1FY21 GDP remain very low, with Goldman Sachs estimating India’s economy to contract by a huge 45% in the June quarter and projects a 5% fall in gross domestic product (GDP) for 2020-21. Ratings agency Moody’s downgraded India’s sovereign rating to Baa3 from Baa2, citing reasons of structural weaknesses, weak policy effectiveness, slow reforms momentum for maintaining a negative outlook.

The Rs. 20 lakh crore economic stimulus package amounting to 10% of GDP announced by the finance minister (in 5 phases) garnered minimal enthusiasm from the business community, as the cash spend was considerably less. Agriculture, food processing, animal husbandry and other farm related segments cheered due to reforms and new schemes under implementation, while other sectors envisaged restricted benefits.

NSE’s market pulse has provided a detailed view of each of the tranches announced in the 5 tranches. Source:

First Tranche:

Second Tranche:

Third Tranche:

Fourth Tranche:

Fifth Tranche :

Indian stock market didn’t react positively to these proposals but moved on to end the month at a lower level. So, what holds for investors in Jun? Central Banks across the world are pumping in billions of dollars and euros to provide sufficient liquidity. For the moment, stock markets are on a rally mode. However, the global economic scenario remains grim. While there is no substantiated correlation between stock markets and economy, it is bound to catch up at some time or the other.

June in particular hasn’t been great for Indian stock markets over the last 5 years.

But this could change soon and we might witness a sharp rally. Analysts are already discounting FY21 earnings and started factoring in FY22 earnings growth. From that perspective, the current stock prices of many good and healthy companies seem reasonable and fit for investment, from a 3 to 5 year perspective. As Benjamin Graham said “Every individual investor should act consistently as an investor and not as a speculator. Reiterating a well-known fact, look at businesses, not just stock prices. These could be great times to invest, in good businesses with a future.

Stay Safe & Invest Better!