Lockdown extended: Global cues to drive market, experts see stimulus by April-end

Prime Minister Narendra Modi on April 14 announced an extension in lockdown till May 3. Earlier the lockdown period was announced from March 25 till April 14.

He further said the government will observe the situation of every state and will start operations in those parts which are green zones. Agriculture and essential services will not get disturbed during the lockdown period, he added.

Experts feel the extended lockdown will have impact on economy and earnings. Hence they expect some selling pressure to remain but overall the market will not have any major reaction during the extended lockdown period and will remain rangebound till the virus spread gets controlled.

"The continuation of the lockdown will certainly put additional pressure on an already sinking economic growth, consumer sentiment and corporate earnings. We expect the markets to remain under pressure unless the virus gets defeated or some medical solution emerges," Kedar Shahoo Kadam, DGM & Head Research at Cholamandalam told Moneycontrol.

Sanmukhani said, "Based on the available information on the lockdown extension in the media, we are not expecting any reaction from the market to the actions taken for extending the pan-India lockdown. However, the commentary and actual relaxation provided will be observed by the market participants."

Heavy FII selling (more than Rs 65,000 crore of outflow) was seen in March, but the absence of same large selling helped the market recover since last week of March. In line with global peers, the market crashed 38 percent from its record high seen in January, but recovered around 20 percent from March 23's low following stability in global peers, reduction in FII outflow and hope of new infections each day in Europe and United States may be declining.

"I don't see any possibility of large selling unless anything negative comes on the global front, which means the major sell-off if it happens going ahead will only because of global reason," Shilendra Kumar, CIO at Narnolia Financial Services said.

He feels the market downside will remain protected, which means 7,500 on the Nifty (broken on March 23) will not get broken till the large FII selling, while upside will be capped till we get a clear picture of FY21 corporate numbers.

Experts were more worried about rabi crops, but Prime Minister clearly said the harvesting of rabi crops will be done with proper social distancing and the government will procure the same from farmers.

"I was also worried about rabi crop, but the government clearly said they will procure rabi crops from farmers and even Punjab government already started buying from farmers. It means harvesting will be done at right time," Shailendra Kumar said.

Kedar Shahoo Kadam, DGM & Head Research at Cholamandalam also said, "Most of the green zones are in rural areas, hence, top priority will be to restart activity in the agriculture sector, to timely harvest the rabi crop. We expected the government to approve all forms of farming activity."

He expects the focus to remain on the industries catering to consumer supplies and essentials, including agriculture.

Earlier the Uttar Pradesh (UP) government has helped reopen over 5,000 industrial units during the lockdown period, mostly engaged in manufacturing of medical supplies and essential commodities.

The government allowed some industries including pharma and its related industries (packaging, chemical etc), select textile etc to commence operations, which we saw from the corporate announcements.

"As far as relaxation is considered, it depends on the guidelines. We are not expecting full fledge operations in any sector. If also it is provided, the operations will not be optimum," Sanmukhani said.

"Lockdown and its extension will gross impact the economic activities. The longer it is stretched more the negative impact," he added.

Most experts feel after welfare measures and liquidity stimulus, the government will definitely come out with big fiscal package for corporates, industries etc. According to them, the package will not be of same size of packages announced by other nations given the tight fiscal position, but atleast may help MSME or small industries.

"I expect some kind of big stimulus package by April 20 or before the end of April as I am worried more about MSME sector which deals more with common people, has more employee base than big corporates etc. They may find more difficulty in paying salaries, rent etc," Shailendra Kumar said.

Emkay said the analysis showed that a month of lockdown could shave off Rs 10 lakh crore of GDP (or 5.3 percent). It believes the required size of stimulus package should be of this scale – even then it would still be lower than the packages announced by other infected countries.

US announced more than $2 trillion package, Japan around $1 trillion and even European nations' package in trillions.

"But given the tight fiscal position (excluding any stimulus, fiscal deficit might still slip to 5.1 percent of GDP) and centre's apprehension on reflationary stance, the package is likely to be much lower in the range of Rs 2-3 lakh crore which we believe won't qualify as a stimulus package," Emaky said.

"Around 42 percent of the non-agri workforce is in the informal category; hence, it's important to have targeted packages to incentivize employment and prevent job losses. MSME and construction sectors were struggling even before COVID-19. These sectors need to be given strong support from fiscal and monetary side," it added.

The brokerage feels government should announce targeted bonds rather than monetizing it through RBI - expect G-sec yields to harden.

The RBI's role would be providing liquidity in the market and tempering down the credit spreads.

"We do not expect stimulus from RBI as RBI has been doing enough to maintain liquidity through long term repo operations (LTRO), so liquidity is not a problem," Shailendra Kumar said.