The sharp contraction in India’s gross domestic product (GDP) in the June quarter reflects the growing divergence between equity markets and the country’s weak macroeconomy.
Government data released on Monday showed that the Indian economy contracted by a record 23.9% in the first quarter of fiscal 2021, mainly due to the COVID-19-induced lockdown.
However, in stark contrast, Indian equities rose nearly 20% in the first quarter, largely thanks to foreign liquidity that is pouring into equities around the world. Equity markets, so far, have not been affected by the weak macros, but the record contraction in GDP in the first quarter suggests that the recovery in corporate earnings will be an uphill battle amid valuations that appear to be overheated and a low fundamental support for stocks.
“Now the markets will seek the recovery of GDP in the remaining months of FY21. However, this would not be strong enough to offset the impact of the first quarter. The base effect will drive growth in fiscal 22, “said Naveen Kulkarni, chief investment officer at Axis Securities.
Kulkarni said that markets will now keep an eye on how economic activity develops and the direction of high-frequency indicators after Unlock 4.0. He added that a timely monsoon has also fueled optimism for improved planting of kharif, supported by reverse migration that helps labor availability in rural areas.
With the growing number of COVID-19 cases in the country and lockdowns at specific locations in the wake of the rapid spread of the virus to rural areas, corporate earnings growth is at risk in an already struggling business environment. experts said.
Suvodeep Rakshit, Vice President and Senior Economist at Kotak Institutional Equities, said: “Looking ahead, given the gradual improvement in activity indicators (which remain well below pre-covid levels), growth recovery will be gradual. and will contract for all quarters in fiscal year 2021. In addition, the recovery of growth will also depend on stopping the spread of covid and the elimination of even localized blockages. The government’s choice will depend on whether it is necessary to boost consumption or investment. Given limited fiscal space and the need to stimulate more durable growth, the recovery in growth will be gradual and is likely to continue into the first half of fiscal 22. “
In the June quarter, quarterly earnings and sales for Indian companies hit at least a 22-quarter low in the three months through June, dampening hopes for an immediate recovery with COVID-related disruptions likely to persist in the coming months. .
Combined adjusted net income fell 74% in the June quarter from a year earlier, while net sales decreased 26.5%, according to a mint analysis of 970 listed companies in the manufacturing and services sectors. This is the worst drop in earnings since the quarter ended March 31, 2015. The mint The study excluded oil and gas and financial services companies as they follow an independent revenue model.
Lower raw material prices, reduced employee costs and other cost-cutting measures appear to have protected the margins of several publicly traded companies compared to previous expectations of a severe impact from the lockdown on profitability. However, cost-cutting measures would depress revenues and reduce consumption, analysts fear.
“Looking ahead, it seems that July was worse than June and the initial data for August is not very encouraging either. There would be another contraction in Q2FY21; However, what to watch out for, and as we have always feared, the turnaround since the late 1920s could be much slower than general expectations, “said Nikhil Gupta, Institutional Equity Economist at Motilal Oswal Financial Services Ltd .
With the risk-reward for the Indian markets turning unfavorable with high valuations and weak corporate earnings, inflows of foreign liquidity will be critical to keeping the markets rebound intact.
Foreign Institutional Investors (FII) bought $ 6.35 billion worth of Indian shares in August after a net purchase of $ 1.15 billion in the previous month. This is the largest purchase of Indian shares by FIIs since September 2010, when there was a net inflow of $ 6.37 billion. National institutional investors, however, sold ₹Rs 11,727.66 crore in shares in August, the largest sell-off ever by domestic investors since March last year.
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