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Market expects gradual withdrawal of lockdown measures, say analysts

Policemen outside the sealed KDP Grand Savanna society, marked as a Covid-19 hotspot, in Ghaziabad (Photo: PTI)
With Prime Minister Narendra Modi scheduled to address the Nation on Tuesday, the jury is still out on whether the government will opt for a gradual lifting of the blanket 21-day lockdown imposed recently or will the full-scale shutdown continue.

While on one hand there is a possibility that the government may look at starting economic activity, albeit partially, in select ‘green zones, or areas with minimal coronavirus (Covid-19) cases, four states – Telengana, Odisha, Maharashtra and Punjab – have already extended the lockdown period till April 30.

Analysts at Nomura say the experience of countries that have successfully flattened the curve suggests that the duration of the lockdowns could be longer and, even after a strict lockdown ends, social distancing measures will remain in place. Hence, while the peak economic hit will be seen in the second quarter of 2020 (Q2), activity will likely remain below-potential for much longer. The cumulative economic cost of a prolonged period of sub-par activity, in turn, can have knock-on effects that could amplify the direct economic effect of COVID-19, they said.

On their part, the markets have gained nearly 18 per cent since their March lows, powered by stimulus measures announced by the government and the Reserve Bank of India (RBI) to cushion the economic fallout of the Covid-19 pandemic.

Nischal Maheshwari, chief executive officer for institutional equities at Centrum Broking, expects this 21-day lockdown to get extended and only a very gradual withdrawal from this. As a result, he believes the gross domestic product (GDP) growth for the first two quarters will come in around 1 - 1.5 per cent and a full recovery will happen only by the festival season.

“We believe this (lockdown) will be extended and there will be very gradual withdrawal. Given the uncertain economic outlook and high volatility, it is best to stick to defensive portfolio. Prefer large caps over midcaps and advise to totally avoid small-caps. Effect of the slowdown will be most felt on the first two quarters of financial year 2020-21 (FY21),” Maheshwari says.

Analysts at other brokerages, too, echo a similar sentiment. Abhimanyu Sofat, head of research at IIFL Securities, for instance, expects the lockdown to be phased out in a staggered manner and the impact of this on the economy will be significant for the April-June quarter. “We maintain our negative view on the market due to expectations of very slow lifting of sanctions,” Sofat said.

Those at Antique Stock Broking, on the other hand, suggest the recent rally seen in India as well as global equities was only on hope / announcement of further stimulus and optimism around likely flattening of new cases (both in US and Europe). They, too, caution against market volatility as the world is not out of the Covid-19 pandemic woods yet.

“In our base case scenario (assuming Covid-19 impact till September 2020), we have downgraded FY21 / FY22 earnings by 16.9 per cent / 14.4 per cent and accordingly our revised Nifty target price stands at 9,900 (at 15x FY22e EPS). We believe that as Covid-19 spread has not yet peaked in India, our bear case scenario may also play out and hence we feel that market may see further correction (Nifty-50 target price stands at 7,000 in case of bear case scenario),” wrote Dhirendra Tiwari and Pankaj Chhaochharia of Antique Stock Broking in a recent report.

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