Markets breathe easy but need to brace for a tough earnings week

With the government’s 21 trillion stimulus package announced and the partial reopening of the economy gathering pace, stocks seem set to consolidate the coming week. The stimulus package was among the key indicators whether the revival would be faster or gradual. Going by the market’s sideways reaction, investors seem to be settling for a slower recovery.

The package addressed supply-side constraints and offers good liquidity to and ease bottlenecks in several sectors, particularly agriculture and small enterprises. Some of the highlights of the stimulus package are the easing of the rules of The Indian Bankruptcy Code. The government’s focus on stress in the rural sector with ample support to farmers through various schemes is also a step in the right direction.

But while that is good news, the markets did not cheer the some of the government’s earlier announcements. In fact, markets closed flat last week when details of the package were being announced.

All eyes were also on the impact of the stimulus on fiscal deficit. Much of the stimulus was indirect. Hence, market experts reckon that the impact of the package on the fiscal deficit would be minimal, even less than 1% for now.

However, while these are still early days, the loss of economic activity could still push up the fiscal deficit during the year. Brokerage firm Nomura Financial Advisory Services expects the fiscal deficit in FY21 to nudge 7% of GDP (against the budget’s 3.5% target), due to weaker revenues.

That may worry the markets a tad. In addition, some companies which announced fourth-quarter results recently have begun showing huge impairments at the tail-end of the fourth quarter. This could be a prelude to the carnage that is likely when companies actually begin to report first-quarter figures. More than 80-odd companies are expected to announce their results this week.

The bond markets continue to ease off as inflation is coming off. As the stimulus package banks on lending and liquidity measures of The Reserve Bank of India, it does not much hit the government’s own finances.

Besides, challenges in the domestic economy and results of companies such as ABB Ltd suggest that the climb is uphill.

Godrej Consumer Products Ltd did not post good results, but the stock held up as management exuded confidence. Some growth was seen despite the Covid’19-related shutdown.

Of course, for stocks such as Nestle Ltd market dynamics vary. While the company posted decent results, the stock slipped last week after a strong run-up in the past year. Nestle’s Q2 CY20 figures are likely to be weaker on lower manufacturing and supplies, said analysts.

Nevertheless, the coronavirus pandemic is still unfolding. Cases in some of the hotspots continue to rise. Globally, there has also been a spike in covid-19 cases and in important economies of US and South America.

Markets have taken some of this in their stride given that it seems to have stabilised in the past few weeks after rebounding from the lows. However, investors need to be prepared for a string of tough earnings calls and massive disappointments.

Many investors are pricing in a quicker recovery to normalcy. But with the stimulus focusing on addressing long-term concerns, a slower recovery may be on the cards. Hence, investors cannot ignore the potential negative risks.

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