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Post-lockdown economy: How worse is the worse in 2020?

The Nifty 50 index is trading at around 19 times estimated earnings for the year ending March 2022. History tells us that share prices do not go much further unless profits grow

Published: 26th October 2020 05:46 AM  |   Last Updated: 26th October 2020 05:46 AM   |  A+A-

economy

For representational purposes (Illustration | Tapas Ranjan

Express News Service

Back in April 2020, this column dwelt on the topic of things going from ‘bad to worse’ for your money. It is October 2020 and time to review. The number of worldwide cases is now over 42 million. They were 3.5 million in April 2020. That is a jump of nearly 12 times. The total number of deaths is 1.14 million. That is almost a five-fold jump.

In the Americas and Europe, new cases continue to rise while they are declining in Asia and Africa. There is light at the end of the tunnel though.

More people are recovering, and fewer are dying. In India, lockdowns are getting lifted, and people are getting back to the business.

The Reserve Bank of India hesitated from making any inflation and growth prediction for two consecutive policy meetings.

In the latest one in October 2020 though, the committee quoted high-frequency indicators in the latest credit policy announcement and said that the process of economic recovery has started.

In the minutes of the meeting held earlier in October 2020, the RBI committee projects the consumer price inflation to hover around 6.8% for the quarter to September 2020.

It would further decline to about 5% in the second half of 2020-21. It is slightly higher than 4% range predicted in a survey by CARE ratings we spoke of around April 2020.

The RBI monetary policy committee will watch the consumer price inflation trend like a hawk. It has said that it would follow an accommodative policy stance to stimulate economic growth. That means borrowing rates may not increase even if inflation is a tad higher than the desired level.  

The ‘worse’ is in the economic growth data. In April 2020, we quoted a CARE rating survey that predicted annual economic growth for 2020-21 to be around 2-3%. From the International Monetary Fund, World to RBI’s forecasters, India’s growth is now expected to shrink by nearly 10%. That follows a dramatic 23.9% fall in the quarter to April 2020. It is tough to recover from such a setback. It is so bad that an average Bangladeshi is more affluent than an Indian.  

What it means to your money 
It is time to exercise caution with money. There is no need to be scared, though as the uncertainty diminishes. When investing in equity markets, you need to be mindful of the valuations. Share prices have crawled their way back since April 2020 to pre-COVID levels.

Now, stock prices are taking into account the profitability of businesses for the year ending March 2022. That means investors are forgetting the dramatic fall in the revenue and profits in 2020-21.

They are already assuming a fat recovery in 2021-22. The Nifty 50 index is trading at around 19 times estimated earnings for the year ending March 2022.

History tells us that share prices do not go much further after that level. For share prices to rally also, profits have to grow much more. Otherwise, rising share prices could only create a bubble. 

Financial markets are flush with cheap money with interest rates in rich countries at near zero. Foreign portfolio investors are net buyers in India to the tune of $ 6bn. Earlier, domestic mutual funds were buying Indian equities.

However, redemption pressure is evident from a sharp selloff by them recently. 

Effectively, Indian shares are relying on foreign portfolio money. If election results in America in early November throw up uncertainty, share prices may fall sharply everywhere in the world.  

As an investor, you need to be careful while investing your hard-earned money. Share prices are unlikely to go up significantly unless profits improve.

They could fall due to an event but eventually, crawl their way back to the current level like they did between April to September 2020. You must stay invested in companies that have a strong financial record. 

You may need to keep a substantial amount of cash position to ‘buy on dips’ or a market fall. For mutual fund investors, staying invested through systematic investment plans makes sense. In the event of a market fall, you can buy more units.  

(The author is editor-in-chief at www.moneyminute.in)



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