What Brokerages Made Of The Events That Shook The Market

Indian markets reeled under the impact of the coronavirus outbreak, mirroring their global peers.

On Monday, the Nifty 50 ended at its lowest level since December 2018. The 5 percent drop was the worst drop for the benchmark since November 2016.

That comes as the government placed private lender Yes bank Ltd. under moratorium and the Reserve Bank of India superseded its board and capped withdrawals for a month.

Here’s what brokerages are suggesting their clients in these times of uncertainty:

Jefferies

• After a 16 percent correction in the Nifty from its January peak, our favourite market valuation indicator (bond yield-earnings yield) is at its lowest level since the global financial crisis of 2008.
• Returns from these levels have been usually attractive.
• The outstanding risks are possible as Covid-19 spreads in India and contagion from the Yes Bank issue.
• Steep crude correction should partially help offset these risks.
• With India not significantly impacted by the two major global events this year, its underperformance to peers is largely driven by domestic factors such as slowing growth and the banking sector issues.
• However, with valuations much more amenable now, we believe that the risk-reward is favourable.

Citi

• Global GDP estimates have and will likely continue to be revised down with the Covid-19 outbreak spreading outside China.
• Our December 2020 Nifty target is 12,200 but a sharp pick-up in infections in India and a widespread panic remain risks. India's relative attractiveness in the EM context on Covid-19 impact (so far) and relative.
• Valuations (in-line with long-term average) make India reasonable in ‘relative’ terms.
• Even absolute valuations have now declined to more reasonable ~16x versus >18x
• earlier.
• We are now ‘underweight’ on pharma and reallocate the weightage into multiple sectors. Banks, industrials, energy are top ‘overweights’ and staples, metals, autos are top ‘underweights’.
• The lagged impact of slowing global growth and other domestic factors could weigh on economic activity in the first half of FY21.
• Consequently, we revise down our FY21 real GDP growth forecast by 40 basis points to 5.5 percent year-on-year.

CLSA

• The ongoing decline is the 19th instance of an over 10 percent fall in the Nifty since 1992.
• The Nifty’s earnings yield minus the 10-year bond yield is now near levels which have coincided with historical Nifty bottoms.
• Nifty’s PE of 16.4x has reached close to the bottom of past three falls of over 10 percent. However, the top seven momentum indicators, which have an accuracy of 67-100 percent in predicting previous bottoms, are yet to signal a final low.
• Possibly, a large part of price fall may have played out but we may see a longer correction period.
• With valuations (PE and the 10-year bond) supportive but momentum indicators yet to signal a bottom, we expect a correction period before a final bottom is made.
• Typically, bull markets see buyers return before a final, major low. Therefore, if our premise of this not being a deeper correction is true, buying should emerge before the last Nifty bottom of 10,600 (ie 10,600-11,100). Obviously, this premise assumes Covid-19 does not have a much longer and a much deeper impact on the economy.

Credit Suisse

• Since 2000 there have been 15 episodes of the Nifty falling more than 10 percent from the prior peak, including the recent one Jan. 14. when the Nifty took to new highs, and so it is tempting to see the current fall as a buying opportunity. But in six of these episodes the decline stretched to more than 20 percent, usually due to global uncertainty.
• While accurate data on Covid-19 mortality/morbidity and even infections is unclear, the panic/caution among citizens of various countries may not settle for at least the next few months.
• Known policy tools, like the earlier-than-expected 50 basis points U.S. Fed rate cut may prevent financial turbulence but may not revive growth. A $30/barrel fall in crude means a $42 billion (1.4 percent of GDP) boost to the Indian economy. But lower oil may not be good for the markets.
• In a period of uncertainty, we prefer stocks with low operating and financial leverage. We then prefer operating leverage to financial leverage, as stocks with high debt can be at risk of not surviving the downturn. Adding weights to Tata Consultancy Services Ltd, Godrej Consumer Products Ltd. while removing from Reliance Industries Ltd. and Motherson Sumi Ltd.

Edelweiss

• Coronavirus is catching on in India when growth expectations and confidence are already under the weather. This should precipitate a dose of monetary stimulus but the recovery is likely to be stretched.
• There’s virtue in patience over opportunism, for now.
• India’s fiscal policy response to the recent slowdown has been timid.
• We believe Coronavirus could just be the right excuse (an external event) for the government to step in and stimulate the economy.
• We are cutting GDP estimates and do see downside risks to consensus forecasts.
• We are trimming December Nifty target (to 12,000 from 12,300), anticipating more moderate earnings while maintaining the 17x multiple.

JP Morgan

• The Indian economy is simultaneously being subjected to an adverse demand shock (global demand destruction from the virus), a positive supply shock (falling crude
• prices), tightening financial conditions as equity prices fall and credit spreads widen, as well as a flight-to-quality after the YES Bank moratorium.
• Furthermore, none of this takes into account the real elephant in the room: Will Covid-19 proliferate within India? If it does, and induces sharp risk aversion among domestic residents, the hit to domestic activity could be material and swamp other forces.
• With so many cross currents underway, it’s no wonder that India’s VIX (volatility index) is currently at its highest level since the global financial crisis.
• Even assuming Covid-19 is quickly contained within India, the global spillovers to Indian growth will be meaningful, but largely offset by the collapse in oil prices.

Kotak Institutional Equities

• The valuations of most parts of the Indian market have become quite attractive after the sharp decline in stock prices on Covid-19 concerns.
• The global Covid-19 situation is still quite fluid for us to make a strong call for aggressive investment at current levels.
• Nonetheless, the sharp decline in new cases in China is heartening.
• India is largely unscathed by Covid-19 (so far) and lower crude oil prices provide buffer to the Indian economy.
• Yes Bank overhang is largely addressed and no lasting impact on India’s financial system is seen. The valuations of the broad market look reasonable versus long-term multiples and bond yields on an absolute basis.
• In most sectors barring large caps, consumers trade at attractive or reasonable valuations; some of them reflect ESG-related concerns (Environment, social and governance).
• PSU stocks have seen a significant de-rating on the back of ESG issues and the proposed ‘solution’ for Yes Bank may further aggravate these valid concerns.

Motilal Oswal Financial Services

• While the six-sigma event—the coronavirus outbreak—has both economic and political implications, the exact nature and quantum of the same are difficult to forecast.
• Global growth and trade might deteriorate further if the current situation persists or escalates further.
• Although India is predominantly a domestic consumption-driven economy, its trade inter-linkages with the world and integrated supply chains in several sectors bring in an element of risk.
• In fact, this event has introduced additional downside risks to our earnings estimates for FY21.
• Till we see a semblance of normalcy returning to the global economy and markets, the Indian markets are likely to track global movements and stay narrow.
• Fluctuations in FII equity flows can also add to volatility. Meanwhile, select sectors with better earnings visibility will continue enjoying valuation premium over broader markets.
• ICICI Bank Ltd., State Bank of India, Hindustan Unilever Ltd., Bharti Airtel Ltd., Maruti Suzuki India Ltd., Infosys Ltd., HCL Technologies Ltd., RIL, Ultratech Cement Ltd. and Larsen & Toubro Ltd. are the large cap ideas. We prefer stocks like Crompton Greaves Consumer Electricals Ltd, Ashok Leyland Ltd., Indian Hotels Company Ltd., Federal Bank Ltd., JK Cement Ltd., Tata Consumer Products Ltd., Aditya Birla Fashion and Retail Ltd., Alkem Laboratories Ltd. in mid caps.

Nomura

• Compared to peers in Asia, India is relatively less exposed to the disruptions emerging from Covid-19 outbreak.
• In our assessment, the impact on Nifty earnings on account of Covid-19 disruption is likely to be less than 5 percent for FY21, over and above our expectation of a 5 percent cut in consensus earnings due to slower economic recovery.
• We expect a gradual recovery in the Indian economy over the next 12 months.
• A much severe impact outside China and a second wave of the outbreak are the
• downside risks.
• Correction presents opportunity to accumulate select stocks.
• We remain stock selective and are positioned for a gradual recovery in growth.
• We are positive on private banks (beneficiary of market share gains, liquidity, lower rates), infrastructure, cement (investment-led growth) healthcare (low expectations and
• attractive valuations).