Adroit PMS Oct'20 Newsletter - Economic recovery taking shape


Expectations of a stimulus package from the government and firm global cues helped Indian markets to recover from the sell-off in September-2020. The BSE-30 and Nifty-50 indices fell 1.5% and 1.2% in September while BSE Mid-cap and BSE Small-cap indices gained 0.3% and 3.7%. Investors are eyeing the RBI monetary policy and awaiting a second stimulus package from the government side before the festive season. We believe the Monetary Policy Committee's stance will continue to be accommodative and supportive of economic growth, although we may not see any rate cut

In September, global equities (-3.97% m/m) registered its first monthly decline after months of recovery from the March sell-off. During the month, NASDAQ index once dipped into correction territory (by falling more than -10% from the recent peak). With less than a month to the US elections, we continue to expect a volatile market, having Covid-19 in the background and political tensions between the US and China likely to remain elevated. After surpassed the USD2,000/oz mark in August, gold traded weaker last month (now at ~USD1901.3/oz), but we continue to favour the yellow metal in a diversified portfolio  

As India’s GDP growth outlook falters, earnings visibility remains murky across sectors. The financial sector has been the biggest laggard and expectedly so, as GDP contraction aggravates NPA risk.The recent rally across mid- and small-caps is yet to bring about a reversal of the long-term bearish trends that began in Jan '18. Performance of these indices continues to diverge from that of large-cap indices, though we do note a common thread of outperformance among pharma, chemical and IT companies across market cap. Energy and telecom are yet to catch up as macro concerns over regulations and economic recovery weigh heavy. Financials, consumer and industrials face emerging earnings downgrade risks stemming from pandemic unknowns.

Post RBI’s announcement on restructuring on August 6, 2020, the KV Kamath Committee submitted its recommendations on financial parameters to be factored in for restructuring of Covid-19 corporate stress. The report indicates sector specific leverage and debt servicing metrics to be gauged by lenders in lieu of restructured accounts by FY22, FY23E. As per guidelines, borrowers that were classified as standard or SMA-0 (less than 30 days default) with the lending institution as on March 1, 2020, would be eligible for resolution. Such stricter norms for restructuring, coupled with limiting the maximum restructuring tenure at two years for the residual tenure, would ensure only eligible businesses get restructured. Thus, restructuring norms are seen providing support to eligible borrowers and provide the needed breather to lenders  

The economy continued to improve in September which was reflected in high frequency data like Auto sales and PMI numbers. The manufacturing PMI for September pointed to a very strong rebound in manufacturing as it improved to 56.8 in September from 52.0 in August. This is the highest reading for the indicator since January 2012. The reading was driven by majority of the component including new orders, production, export sales, input stocks along with an improvement in business confidence

Unlock 5.0 carries forward the momentum from unlock 4.0 with the Government announcing significant incremental relaxations. Unlock 5.0 has mostly been along the expected line that the Government will keep reopening the economy gradually as the Covid-19 situation keeps improving. Due to lockdowns in April and May there is pent up demand which along with inventory buildup prior to the festive season and continued opening up of the economy should lead to further improvement in economic activities over the next month or so.  

The Parliament passed The Essential Commodities (Amendment) Bill 2020. The stated objective of the amendment is to make sure that farmers get remunerative prices for their produce, and large scale private investment in agriculture related infrastructure (cold stores, warehouses and agro processing industry) could be attracted. This amendment was considered necessary to achieve the objectives of The Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Bill, 2020, that enables contract farming and forward contracts in agriculture produce.



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