Stay invested in equities and find opportunities during sluggish phase

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The Covid-19 crisis has disrupted each and every aspect of the economy right from basic needs, lifestyle, businesses and global economy order. Recovering from this was not only a huge task but also was mired in uncertainty. We have how major economies of the world responded and announced significant economic packages to save man, material and businesses from its impact.

Almost a year-and-a-half since the first Covid wave, the global economy is expected to post a strong recovery and the growth momentum is expected to continue to remain strong going ahead. Global growth is expected to accelerate to 5.6% this year, largely on the strength in major economies such as the United States and China, both of them are expected to grow by 6.8% and 8.5% respectively. While the overall level of global GDP would still be lower by 3.2% from its pre-pandemic levels.

Growth among emerging market and developing economies is expected to accelerate to 6% this year, helped by increased external demand and higher commodity prices. However, the recovery of many countries is constrained by the resurgences of Covid-19. What we have seen so far is that the current rebound in global growth is narrow and developed economies have rebounded stronger and faster than many developing economies. This could be due to better fiscal support, fast and wider vaccinations.

Granular data

The global industry growth has shown a remarkable turnaround. All the G20 countries have recorded positive growth in the last three quarters with growth sustaining in the early double digits though the momentum has softened lately.

Also, in terms of lending and trade, average credit growth in G20 countries have risen lately as the economies get normalized, businesses and households started borrowing more with global trade showing resilience and accelerating fast; sustaining high momentum.

Coming to the future growth, near-term growth looks strong with some impact of second/third Covid waves. According to the estimates of the IMF, the global economy would recover smartly in 2021 and would continue strong in 2022. Also, rising inflation remains one of the key risks as inflation is going up in almost all countries and is not just because of base effect and it remains to be seen that how long the global central banks wait before any action or it subsides on its own.

Quarterly results

Coming to the domestic front, we have just concluded the results season. The quarterly results have so far been very good and corporate earnings have improved largely and most sectors have seen improved sales growth and further improved profitability margins.

Coming to the Nifty50 constituents, the sales of index companies in total have improved 43.5% for the latest quarter as compared to the same quarter last year. Although there is definitely a low base effect to numbers still momentum is very strong and in some cases, the business has scaled to pre Covid levels or very close to it. In terms of profitability we have seen sharp improvement in gross margins and PAT margins. The gross margins currently are third highest in past 20 quarters.

Sectorally, the cyclicals like metals, oil and gas performed better while sectors FMCG and auto posted better sales and volume growth but margins remained muted largely affected by Covid-related disruptions in raw material supply which increased costs.

Coming to the near term and long term strategy, in the long- term, the Indian economy is set to continue to grow and gradually pick up momentum which we have already started to witness and subsequently the earnings of the corporates are also expected to improve starting from FY-22 onwards. In near term the markets are looking to get driven more on the global factors for next few weeks as it awaits Q2 results and festival season data which could signal on strength and pace of recovery. As far as third wave risk is concerned, we think it doesn’t seem very alarming right now and as we move forward, the increasing pace of vaccinations are further lowering its probabilities. Regardless, the major risk of third wave would be from unvaccinated non-working population ageing below 18 years.

Overall, investors should continue to remain invested in the equities and find opportunities in between small period of underperformances.

(The writer is Head- Equity Research (Fundamental), Anand Rathi Shares & Stock Brokers. Views expressed are personal)