New beginnings bring new tidings, sometimes never before heard historical changes, as witnessed in the crash & deep dive of crude oil futures into negative territory. Starting off the new financial year, April 2020 witnessed a brief respite in the stock markets world over, though the spread of corona virus hasn’t abated yet. After announcing an initial lockdown of 3 weeks starting 25 March 2020, the Indian government announced a prudent step, to extend it by 2 weeks to "flatten the curve", and extend it by a further 2 weeks.
This lockdown is expected to last till 17th May, contingent on further evaluation of the prevailing scenario. However, by the end of April, considerable relief was provided to industries and sectors in locations without any corona virus cases.
The headline grabbing news of this month include:
- 19% rise in Nifty50 index after a precipitous fall in March,
- Slowdown in FII selling of Indian equities,
- Focus on pharma stocks due to supply of drugs for Covid-19 treatment,
- Futures of WTI crude crashing by 302%,
- Closing of 6 credit risk funds of Franklin Templeton AMC,
- Debilitating impact of corona virus on economy
After a month of serious wealth destruction, stock markets offered a noteworthy respite to investors, as global indices rallied, to recover half of the losses incurred in March. Nasdaq was up 16.71%, while many of the South East Asian indices rallied 10% on an average.
In line with global markets, Nifty50 index clocked a steep 19% up-move, fuelled by investors interest in pharma, energy, metal and auto sectors, while the volatility index tumbled ~ 53%. Pharma index was the best performer, rising an astonishing 35%, backed by demand for Indian drugs across several nations and a series of USFDA approvals for many Indian companies.
Led by exceptional returns from Glenmark pharma (55%), Aurobindo pharma (59.6%), Lupin (44%), and Cipla (43.55%), investors cashed in on the demand for Hydroxychloroquine (HCQ) among other drugs supplied to many nations for Covid-19 treatment.
A similar scenario was evident in Nifty Auto stocks with Motherson Sumi (51%), Tata Motors (37%), Mahindra & Mahindra as well as Bharat Forge (34.5%) posting appreciable returns.
In the equity cash segment (on a provisional basis), April was a notch better, with an FII selling of Rs.5209 cr. as compared to earlier months, when FIIs sold Rs.65,816.70 cr. in March, Rs.12,684.30 cr. in February, while DIIs ended the month with a (-)117 cr. (net of purchases and sales).
After witnessing a market cap erosion of Rs.33.38 lakh crore for the 5900+ BSE listed companies in Mar 2020, April witnessed an increase of Rs.15.92 lakh crore. Of the 18 trading sessions in April, a fall in market cap was visible only for 5 sessions. Mid cap and large to mid-cap categories of companies seemed to be the preferred choice for investors.
Nifty50 index stocks performance was much better, with 46 out of the 50 stocks ending in positive territory for the month. Auto and auto ancillary stocks were in focus on hopes of a lockdown relief provided to certain sectors of the economy, as well as due to lower valuations. Metals sector also showed traction owing to restart of production facilities in China.
A similar incidence, though not in magnitude, was witnessed in USD-INR rate. In 13 trading sessions, Rupee slipped 1.69% to the US Dollar, only to appreciate by 2.47% in the next 7 trading sessions, finally ending with a net appreciation of 0.82% for the month.
These highlights capture the relief & uptick witnessed in the Indian stock and currency markets.
Coming to the news of historical importance, in April, West Texas Intermediate (WTI) crude futures deep dived by 302%, recording the lowest price ever, on concerns of falling fuel consumption due to weak economic data and a global supply glut, owing to Covid-19 pandemic.
International Energy Agency (IEA) expected the demand drop in April to be close to 29 million barrels on a year on year basis (source: https://www.iea.org/reports/oil-market-report-april-2020). A 6.8% shrinkage of China’s GDP (the worst in ~ 44 years) aggravated the situation further. In India too, the repercussions were felt by investors due to the reduced timings of commodity exchange. Finally, the due date rate of crude oil futures contract was fixed at Rs. -2884 per barrel (Yes! A negative number, never seen, heard or spoken of until now). By the way, the operational timings of the exchange have been changed back to earlier state.
Moving on from oil to the investor panic caused due to abrupt closing of 6 credit risk funds operated by Franklin Templeton (FT) Asset Management Company (AMC). Over the last 2 years, companies have been severely constrained for liquidity. Impacted by economic slowdown and a credit crunch, the continuous downgrades of commercial paper by ratings agencies led to a crash in prices and yields rising unabatedly. With lending coming to a trickle, traded volumes fell, creating an illiquid scenario. Faced with redemption pressures from investors, FT took this decision to wind-down 6 schemes, with an AUM of ~ Rs.28,000 cr.
“The extension of the lockdown has heightened redemption volumes and reduced inflows to unsustainable levels. The schemes even resorted to borrowings within permissible limits, in line with market practice to fund redemptions. But given the situation, we felt that it would not be prudent to leverage the schemes further,” said Mr. Sanjay Sapre, President of FT AMC.
The six schemes were:
- Franklin India Low Duration Fund,
- Franklin India Dynamic Accrual Fund,
- Franklin India Credit Risk Fund,
- Franklin India Short Term Income Plan,
- Franklin India Ultra Short Bond Fund, and
- Franklin India Income Opportunities Fund.
If FYERS clients have invested in any of these schemes, do read this letter by FT President to address investor concerns. https://www.franklintempletonindia.com/downloadsServlet/pdf/letter-from-our-president-to-investors-k9fmipmm
Coming to the final newsmaker of the month, it is the spread of Corona Virus and the subsequent impact on the state of Indian Economy. As we speak, globally, corona virus cases have reached 3,584,116, with 248,653 deaths and 1,161,677 recoveries, spread across 212 countries. In India, confirmed cases stand at 42,806, with 1,396 deaths and 11,837 recoveries. The central and state governments are actively involved in controlling this pandemic with all necessary means at their disposal. This is not an easy task and hence, the lockdown has been extended for a third time, which is expected to last 2 more weeks till 17th May.
In the mean-time, govt has gone ahead and segregated the districts across states into 3 zones – Red (130), Orange (284) and Green (319), based on the recorded cases. With certain restrictions for sectors and industries, partial opening up of the economy is in progress, starting 4th May. This phased restart will surely aid in economic activity, albeit at a lower rate.
Most ratings agencies as well as financial institutions have slashed India’s growth targets for FY21.
- CII pegs GDP growth between -0.9% & 1.5%
- India Ratings cuts India's FY21 GDP growth further to 1.9%, lowest in 29 years
- CARE Ratings expects GDP growth at 1.1%
- Fitch Ratings sees India growth slipping to 0.8%
- IMF projects GDP growth for India at 1.9%, World Bank at 1.55%, Barclays at 0%.
These ratings and projections are transitional in nature and as we move forward with the phased lockdown removal, it is expected that economic activity will recover, but with a lag of 9-12 months.
Nations around the world are busy selling record amounts of debt, to support their respective economies weakened due to the pandemic. Government of India is expected to borrow Rs 4.88 lakh crore in April-September period of FY21, nearly 63% of its total annual borrowing program. This announcement coincided with the Goods and Services Tax (GST) collection falling below the Rs 1 lakh crore mark in March after 4 months of higher collections. The government collected Rs 9.98 lakh crore as direct taxes in FY20, a record shortfall of Rs 1.75 lakh crore compared to the revised estimates shared earlier. Central and State Governments are in a tough spot with respect to revenues, while expenditure due to corona virus pandemic has risen dramatically.
Concluding, for stock market investors, April has been a better month in comparison to March. This was in line with the Nifty50 retracement of 50% as per technical analysis and needs to be seen if it can move up to the 61.8% retracement level or fall back down. The Wall Street saying that “Sell in May and go away” can also come into effect, owing to technical and fundamental reasons.
Over the last 10 years, for the month of May, Nifty50 gave negative returns 3 times, was flat 1 time and positive 6 times. How will May 2020 fare for retail investors needs to be seen, in light of the demanding pressures on economy and livelihoods of the Indian populace.
As Warren Buffett expressed his views during his recent presentation to investors (after reporting a net loss of US$50 billion for Q1CY20 due to unrealized losses in investments), He doesn’t find deep value yet and is happy to raise cash levels, wait on the side-lines, biding his time to make the right investments. While this might not be applicable one hundred percent to all types of investors, there is merit in his words, considering that there are barely a few, who can predict the future of economy by diving into the 231-year progression of US history, better than him.
Stay Safe, Stay Home & Happy Investing!