Markets may become suspicious as the impression of GDP shifts to a difficult economic reality

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Stock markets will be on their toes this week as a wave of macroeconomic data is expected to show how much covid-19 has shaken the economy. The first quarter GDP figure could be a washout, with analysts predicting GDP growth to contract by 19% on average.

But given that businesses have had a better-than-expected first quarter and the agriculture sector has shown surprising resilience during the lockdown, investors are hopeful that the final impression of GDP will not be so bad.

In addition, the PMI manufacturing and services figures to be released in early September will give hope that industry and services do indeed pick up.

But there is no denying that FY20 will be the worst year for the economy. Economists and analysts may lower their GDP estimates if the final numbers turn out much worse than expected. Annual GDP is expected to contract by around 5-6%, although further contraction cannot be ruled out.

In addition, the much needed government pressure on the Indian economy is proving slow. The government’s precarious financial situation due to declining tax collections shows that very little can be done to support the Indian economy. Some of its effects can be seen in the capital goods sector.

But the stock markets are on a completely future-oriented path other than that of the rearview mirror. On the back of a notable recovery in lending, the Nifty Bank Index was a star player last week, gaining around 10% against the 2.5% rise in the Nifty 50. The one-off bad debt restructuring will give banks sufficient time to remedy the hole in the balance caused by covid-19.

Investors are also revaluing certain PSU bank stocks such as SBI, which are quoted at significant discounts compared to their intrinsic value. A recent report from Goldman Sachs upgraded the stock, noting that the bank could still revalue to 0.7 times the book value.

Some other lenders see stress in the moratorium book, such as LIC Housing Finance. But the company is experiencing a resumption of disbursements, while new bad debts are failing.

Meanwhile, for telecom investors, large amounts of data consumption does not manifest itself in higher average revenues per user. Competition continues to undervalue the use of data to gain market share and further deepen the penetration of data services.

Some FMCG companies continue to show decent growth. P&G Hygiene’s gross margin in the first quarter increased 430 basis points, which is good.

However, for cement manufacturers, after the first rise in cement prices due to suppressed rural demand, cement prices are now starting to drop.

Nonetheless, areas such as diagnostics have seen an improvement in covid-19 testing. But, as preventative controls will be impacted, high sector share prices could be at risk.

When it comes to larger markets, the rise is alarming from one point of view: it widens the gap between the market and the economy. Equities are now a far cry from the pain in the economy.

Nifty 50’s trailing valuations have broken their all-time highs of late. Foreign investors have resumed their purchases of Indian stocks on a massive scale. They seem motivated by the need to diversify some of their holdings away from the dollar. This also led to the strengthening of the rupee. A current account surplus due to lower oil import bill adds to the appreciation of the rupee.

This means that we could still see other feeds entering the market from overseas. The only catch is that the number of new cases of covid-19 is increasing day by day. India has crossed the three million case mark, posing a risk to the markets.

Domestic investors who have seen their equity portfolio weight increase significantly may consider recalibrating their holdings. It could also encourage investors to turn to a profit reservation mode.

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