Low valuation – but too early to sound the all-clear
India went into lockdown in the last week of March in order to restrict the spread of Covid-19. This was originally intended to last three weeks, but has now been extended for another four. Virtually all economic activity has ceased.
Although the number of Covid cases continues to increase in India, its prevalence is so far relatively limited in terms of population size, so a cautious and gradual opening began in mid-April of certain sectors and some parts of the country that are in a green zone with a lower spread of infection.
The Reserve Bank of India is providing low-interest financing to the banking system so that banks are able to lend to finance companies and equity funds in difficulty. However, the banks have been reluctant to participate in this programme since the credit risk is not guaranteed by the RBI. Franklin Templeton, a major American fund manager, decided to close its fixed income funds in India that invested in high yield bonds worth USD 5 billion. The reasons were said to be large redemptions and poor market liquidity.
It is too early to sound the all-clear. It is still difficult to estimate the magnitude of the negative economic impact from India’s lockdown. In April, for example, no new cars were sold at all. Consumption is just about the essentials, such as food and medicines. Banks and finance companies risk large new losses on bad debts, as small and medium-sized companies are hard-hit. The government is expected to offer a major support package of USD 100 billion to business, but the problem is that India’s state finances already have considerable deficits.
However, the valuation of the stock exchange is already at low levels. I believe we can easily write off profits for the first quarter, so the question is more about how fast the recovery will be. Global ETFs that had shorted Indian stocks chose to close their positions at the end of the month, which meant that April ended with a strong stock market recovery.