We are into Day 30 of the Lockdown now. Stock Markets over the last few days have been gyrating in a range with days of big sell offs followed by bounce backs as Market participants try to grapple with global newsflow and domestic developments. FB investment into Reliance created a significant rally in that stock aiding the markets and Crude Oil prices have gone into a freefall driven by exhaustion of storage spaces globally over the last few days. The wait for a Fiscal Stimulus in India in the meantime has become an open ended wait

  1. The most crucial development over the last 4 days has been the free fall of the crude oil prices driven by expiry of May delivery contracts in the WTI which took prices into negative (which I frankly did not think could happen). Even after the expiry the prices continue to be in the range of $ 15 as of now. At these prices most of the global production would make losses. The only redeeming feature is that 2-3 months down the line futures are still trading around $ 24-25 on the expectations of the supply cuts agreed by OPEC+ playing out and a resumption of demand.
  2. Crude Oil price crash below particular levels is a negative as it cuts down global capital investment cycle, creates bankruptcies, leads to bad loans building up and also creates losses for many large hedge funds and ETF investors. The markets are sanguine about these developments at this stage but given that it can also destabilize many Middle East economies. Lets see if lower prices are a short term phenomenon or more longer term
  3. Many economies have started opening up. The foremost being South Korea which has handled the crisis brilliantly and is a role model today. They handled the crisis without ever going into a complete lockdown and now with various norms has opened up most of the economy. We are still 3 days into the opening up so the impact on infection spread if any will be known more over the next 7-10 days. Germany one of the most impacted countries where the breakout happened later than Italy and Spain but where recoveries have also been strong started opening up small businesses yesterday. The experiences of these countries will be watched closely
  4. There has been positive newsflow on a continuous basis on Remdesivir the drug of Gilead Lifesciences. There is also newsflow that it can be manufactured by Indian Companies too under licensing by Gilead. The pace of vaccine development also seems to be taking place at a breakneck speed with the Oxford University Vaccine at the forefront. Many of the Vaccine developers have also started manufacturing in bulk even before approvals so that the launch can be fast. However nothing is proven at this stage and this needs to be watched
  5. Domestically the Government has been reluctant to spell out any Economic Stimulus plan. This is now creating a situation where we could see many businesses go down permanently. Many businesses were under stress after Demonetisation and GST implementation and will not be able to take this hit in their stride. As per CMIE data unemployment has already reached 25% in the country. Coming back from this abyss will be very tough for many businesses. Larger companies will be able to get through but even there many commodity businesses could go under deep stress due to the crash in their product prices and a high debt profile
  6. Although global stock markets are significantly off from their tops the bounce back from the bottoms has also been significant showing optimism which might not play out in the near term. Most markets are up 20% plus from the bottoms. A continued rally amidst severe economic disruption will create a scenario where as actual results come out and companies guide (or given their inability to guide) will create a situation where the optimism could lead to another round of big selling. A slowing down of the market move and consolidation at somewhat lower levels is more healthy
  7. Many consumer and pharmaceutical stocks are now hovering near all time highs. While I have written in the past that the first bounce back will be in consumer and pharma stocks the current prices are euphoric as all businesses are disrupted. Factories and supply chains of even these companies are not operational even at 50% levels. Current prices are unlikely to sustain.

Overall it is good that markets have bounced significantly from the bottoms. I have written over the last 10 days that the move should stall which it has but the second round of selling is yet to play out. I would still look to buy only on dips. Near term strength should not attract investors into the markets at this stage. We are still not clear on the direction of the lockdown, whether it will be extended or what will be the situation of relaxations after 3rd of May. The government also believes that a stimulus announcement just before the end of the lockdown will be most effective which in my view is totally wrong as many businesses will be irrecoverable at that stage The 7800 levels when everyone was fearful was the time to invest,

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