The week was manic for the stock markets in more ways than one. Nifty and Sensex corrected almost 28% from peak levels before bouncing back from the lower circuit. In the melee, one must not forget the silver lining in the cloud.
Big global crash
The week saw the crash assuming huge proportions. Not just the Indian market but even other indices like the DJIA, NASDAQ, FTSE, CAC, DAX, and Nikkei lost anywhere between 20-30% in less than a month. Clearly, this big global crash was led by the virus pandemic. Even as the WHO issued a warning, the panic reactions like travel ban are only making the crash worse. The global crash has also been led by concerns over valuations. With US indices giving 31% returns in 2019 with hardly any GDP growth, valuations were a worry!
Next few weeks critical
The next few weeks will be critical in determining how the impact on markets pans out. Even as China has reported a fall in Coronavirus cases, there has been a spurt in cases across Europe, the Middle East, and the US. Unlike the bubonic plague of the 1600s, nations are better regulated and science and medicine have advanced substantially. That will enable the right strategy to control the outcome. Of course, the business loss is fait accompli, but that can be managed. Containment is the key now!
Nifty valuations get sober
One of the big advantages of the crash has been that the valuations have become a lot more sober in India. The best way is to view it is the premium of the MSCI India P/E ratio to the MSCI EM P/E ratio. That ratio had touched a peak of 75% around December 2019, the highest level since the peak of 2008 and so it warranted a correction in the market. However, post the correction in the Nifty and the Sensex, the premium has come down sharply from 75% to around 55% and that is approximately the average that the stock markets have sustained over a longer period of time. That surely creates a valuation case for the Indian stock markets.
Macros also turn better
One big advantage of the slowdown concerns is that it has led to the price of crude oil falling to as low as $33/bbl. That is a price that will entail a huge wealth shift from the oil producers to the net oil consumers. With India’s ~85% reliance on imports, it should be a direct beneficiary of lower crude prices. Current Account Deficit has fallen to a low of 0.20% and the trade deficit for February has come down to below $10 billion. These developments could have a major impact on the external ratings of the Indian economy as a lot of the macroeconomic vulnerabilities are suddenly gone. In the midst of chaos, don’t miss that silver lining.