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What to make of this April rally?

Globally markets have been on a tear in April. The US Dow Jones has its best month since 1987 and has rebounded +30% since the low of March 23 while the BSE Sensex is up 14% in April. The Sensex is trading at 16.6 times estimated 12 months earnings, up from 12.2 times at the end of March. Hence, everyone is asking if this is the start of a new bull market rally!!

Why did the markets go up in April?

The obvious reason is that the earth isn't swallowing people and most governments and

central banks have also come to the rescue. The curve is also flattening in Europe and the US; there are many articles about how Germany has successfully handled the crisis. At home, the numbers are still under control and the slow removal of restrictions only bodes well. The icing on the cake is the endorsement of antiviral agent Remdesivir by US anti-COVID czar Anthony Fauci. There are many working on the drugs and a New York Times article even spoke about nearly a dozen approved drugs that could be effective against COVID. Hope, after all, is a big driver!!

Not all companies in India have gone up in the rally and that does provide some comfort. Travel industry stocks, mortgage stocks, NBFCs hit hardest in Feb-March fall, continue to lag behind. April was also the month when Indian auto giants M&M and Maruti sold '0' cars!! The NSE realty index, for instance, is still down 44% in the last three months, the metals index is lower by 35%, the auto and bank indices by 32% each. It is the Pharma, FMCG and IT sectors that have done relatively well.

What is the data showing?

Data is uniformly bad. US GDP for the first quarter shrank by 4.8% and the unemployed there is now 30 million strong. China’s economy contracted by 6.8% in the first quarter compared to a year ago. More than 100 countries have asked the World Bank for help. They collectively owe $17trn of government debt, 24% of the global total. 18 of them have had their credit ratings cut in 2020 so far by Fitch, more than in the whole of any previous year.

The Economist states that since January foreign investors have withdrawn about $100bn from emerging-market bonds and shares, according to the Institute of International Finance, a banking association. That is over three times what they yanked out over an equivalent period of the global financial crisis.

Back home, the Reserve Bank of India finally came to the rescue of the debt funds, but there are many questioning whether its strategy of getting the banks to lend would prove successful. As SBI chairman said in a TV interview, it is not an issue of liquidity. Solvency is clearly going to be a major issue, which is why attempts are being made to push the bankruptcy law into cold storage. It is also the reason why Axis Bank made large provisions for possible bad loans.

India Inc's profits are surely going to take some very hard knocks. A report by the rating agency ICRA says several AAA-rated companies have also sought payment relief from lenders. The government needs to come out with a bailout soon and it is disappointing to not yet get one. While the staggered lifting of the lockdown will help reduce the severe toll of the past 40 days, especially on the weaker sections, most of our economic activities, unfortunately, are in the RED zones!

What shape will the recovery be?

The short answer is - Who knows? But let us take an educated guess based on history and data. I don't think a V-shaped recovery will happen. There will be some spurt in spending immediately after lockdown is lifted, but I can't think of many who will go for big-ticket items. Confidence is vital for consumption, and this has taken an enormous beating. How many will buy houses or cars, forget even travelling or sending their kids to school immediately?

There are going to be so many behavioural shifts that need to be factored, and this has a significant impact on many companies. We have to see how many adapt and how many don't!!!

A look at the enclosed chart shows that markets have always tested the first fall lows before bouncing back. While no one can predict the future, I expect the recovery to be U shaped or even a W.

We will come out of this but the road to recovery will take time.

Rather than worry about monthly movements, we need to be patient through this cycle and ensure our asset allocation is aligned to our goals.

Source: Moneycontrol, The Economist, Economic Times & CNBC

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