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Franklin Templeton Equity Update, April 3, 2020

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Franklin Templeton Equity Update, April 3, 2020 1 Franklin Templeton Equity Update 03 April 2020 Recent Equity Market Volatility – The 2020 meltdown We live in interesting times. Globalization has unleashed many opportunities for the economies world over but has also presented formidable challenges. The accelerated transition of COVID-19 virus from being a regional epidemic to a global pandemic is a glaring example of brutal side effects of an integrated world. The stronghold of today’s global economic interdependence can be gauged by the fact that the adverse effects of global events on an economy can far exceed the domestic positives. China, the original epicentre for COVID-19, took a series of draconian lockdown measures to contain the virus. This prolonged lockdown has disrupted the global supply chain. As the epidemic gained momentum and engulfed most parts of the world, the global economy now faces aggregate demand shock as well as supply disruptions. The risks posed by the COVID -19 pandemic are being priced aggressively across asset classes including equity. Indian equity markets, as measured by Nifty have corrected by 29% YTD, and over 30% from the peak achieved on January 13, 2020. Crude price has slumped to sub-25 USD/bbl triggered by a weakening global demand and a supply glut triggered by a standoff among large oil exporters. (Data source: NSE India, Bloomberg) Global Market rout in 2020 YTD (upto 31 Mar 2020) -37.03 Brazil Bovespa -34.51 Russia RTS -34.45 Reuters/Jefferies CRB Index -29.13 Nifty 500 -28.57 S&P BSE Sensex -27.95 Jakarta Composite -26.46 CAC 40 -25.01 Xetra DAX -24.80 FTSE 100 -24.05 S&P/ASX 200 -23.87 MSCI Emerging Markets -23.20 Dow Jones -23.01 Singapore Straits Times -22.30 FTSE Eurotop 100 -21.74 MSCI AC World Index -20.16 KOSPI -20.04 Nikkei -20.00 S&P 500 -19.83 MSCI AC Asia Pacific -19.08 Taiwan Taiex -18.60 MSCI AC ASIA ex JAPAN -16.27 Hang Seng -14.18 Nasdaq -9.83 SSE Composite Source: Bloomberg, data from 31 Dec 2019 to 31 March 2020 Prepared on April 03, 2020 2 The Policy Response Global Response The ongoing worldwide lockdown is expected to sharply pull-down global GDP growth. Analysts expect a deep contraction to GDP growth in the US, Eurozone, China, India and other major economies. The policymakers worldwide have swung into action to counter the resulting economic shock. Some of the key measures are enlisted below: (Data Source: Bloomberg) • Federal Reserve cut rates by 150bps, UK by 50 bps, China by 100 bps, EU by 25bps, Canada by 100 bps • CARES Act - passed by the US lawmakers, is a USD 2.2 Trillion aimed at facilitating individuals and businesses. • ECB announced Euro750 bn pandemic emergency purchase program as a part of quantitative easing India’s Response Starting from March 25, Prime Minister announced a 21-day nationwide lockdown in response to the COVID-19 pandemic. From thereon, India has taken bold steps to contain the spread of COVID-19 by encouraging social distancing, enforcing complete lockdown, sealing international borders and restricting domestic travel. The Government and the Regulators have responded to the crisis in a coordinated and proactive manner. Some of the policy measures taken: (Data source: Bloomberg, RBI) • The government announced a Rs 1.7 lakh crore relief package aimed at providing a safety net for those hit the hardest by the COVID-19 lockdown. The measures include a combination of direct cash transfers, free food and fuel for three months among others. About 800 million people will get free cereals and cooking gas apart from cash through direct transfers for three months. • RBI also cut the repo rate by 75bps giving priority to growth and financial stability over inflation. It also announced liquidity measures worth Rs 3.74 Trillion (USD 50 Bn) through a combination of a new Targeted Long-Term Repo Operations (TLTRO) and reduction of Cash Reserve Ratio (CRR) by 100 bps. Further, it also announced regulatory forbearance measures under which lenders can allow a moratorium of three months on debt servicing falling due between 01st March 2020 and 31st May 2020. Since we are at early stages of implementing measures to tackle COVID-19, the overall impact remains to be seen. The modest economic recovery made in the last few months is expected to be reversed as lockdown measures take a toll on supply and demand. The COVID-19 Bear Market - Taking a Historical Perspective In general, a bear market is defined as one where the leading equity indices fall by over 20%. By that definition, India has now gone through three bear markets in the current century – (1) The Tech Bubble Burst (2000-01), (2) The Global Financial Crisis (2008-09), and (3) the ongoing COVID-19 led market fall. But like every bear market, this bear market has some traits that stand out. Firstly, the fall has been too fast. The “average daily decline” so far has been 0.62%, as compared to 0.22% during GFC which itself was unprecedented. And secondly, this fall has happened in a relatively robust macroeconomic backdrop for India as compared to the previous bear markets. It may be useful to appraise the current situation through three prisms – Economics, Sentiments and Valuations. This will hopefully provide a valuable guide to the current investors. (Data source: Bloomberg) Prepared on April 03, 2020 3 Macroeconomic Situation – Challenging, but India looks stronger Inflation tamed: India has adopted an inflation-targeting India’s Core inflation softening1 mechanism and hence inflation appears far more tamed now. The indicators such as falling food and fuel prices point towards a continued correction in headline inflation over the months ahead. This has emboldened the RBI to take extra-ordinary steps to protect the economy from spiraling lower. Lower Crude Oil Prices: Despite the expected weakness 200 in FPI inflows, the Balance of Payment could materially Brent Crude price (USD/bbl) trending 2 benefit due to gains from the lower oil import bill. Crude down 150 144.42 price has corrected by around 65% in 2020 YTD (Jan- March quarter) 100 50 36.61 28.94 0 22.74 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 Apr-18 Apr-19 Apr-20 INR versus 36 basket Currency REER3 Well Managed Currency: RBI has a strong dollar arsenal to 125.00 defend the rupee. As on February 28, 2020, India’s total 122.05 119.47 forex reserves stand at around USD 481.54 Bn. This allows 120.00 the RBI to use forex swaps to inject liquidity, without resorting to open market operations that tend to impact 115.00 interest rates. In March, RBI has done two tranches of dollar-rupee swaps of $2 billion each as the rupee was 110.00 109.78 falling sharply against the US dollar. 36 currency basket 105.00 Rupee has shown relative resilience as compared to other emerging market (EM) currencies in light of USD 100.00 appreciation in the recent market turmoil. Extent of Jun-19 Jun-18 Jun-17 Jun-16 Jun-15 Sep-19 Sep-18 Sep-17 Sep-16 Sep-15 Dec-19 Dec-18 Dec-17 Dec-16 Dec-15 Mar-19 Mar-18 Mar-17 Mar-16 Rupee’s depreciation to USD has been lower than that of Mar-15 Mar-20 other EM currencies as seen in the uptrending rupee movement versus the 36 currency basket. (Data source: Bloomberg) Source: 1. ICICI Securities 28-Feb-2015 to 28-Feb-2020; 2. Bloomberg, data from 1-April 2005 to 1 April 2020, 3. Bloomberg, data from 31 March 2015 to 31 March 2020 Prepared on April 03, 2020 4 Sentiments at a record low. India Volatility Index (India VIX), an index 80 Indian VIX at an all-time high4 disseminated by the NSE, measures the degree of 56.07 72 volatility or fluctuation that active traders expect in 60 India Vix Long term avg the Nifty50 over the next 30 days. India VIX is at an 19.3 all-time high – higher than the levels seen during 40 the GFC. 20 0 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20 FPI outflows during periods of steep market correction5 Sudden surge in FPI capital outflows - 2020 As mentioned earlier, the pace of outflows has been unparalleled in recent times. The adjoining image highlights the amount of FPI outflows after different number of days from the day of market peak (T). Indian capital markets saw an outflow of nearly USD 19 Bn in less than four weeks since February 20. Valuations – At a trough Irrespective of the valuation parameter, markets appear very attractively poised from a historical perspective. The market valuations are almost at their cheapest levels in the last two decades in terms of Price to Book (PB) and Market Cap to GDP ratio. 7 30.00 Rolling P/ER6 4.50 Rolling P/BVR 25.00 4.00 18.11 20.00 3.50 2.74 3.00 15.00 15.00 2.50 10.00 2.00 5.00 2.05 1.50 0.00 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20 Source: 4- NSE India, 31-March-2009 to 31-March 2020; 5 – Citi Research 2013 to 2020; 6.
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