9,418.35103.4
Stock Analysis, IPO, Mutual Funds, Bonds & More

There is a danger of calling the market bottom too soon: Anand Radhakrishnan

We are looking at 4-6 quarters for the economic situation to normalise, says the CIO - Equity & Executive Vice President of Franklin Templeton.

ET Now|
Last Updated: Apr 07, 2020, 12.25 PM IST
0Comments
Anand Radhakrishnan, Franklin Templeton-1200
Recoveries are painful, they take time, they take significant readjustments and recalibration of economies and companies.
What is your understanding of the way markets have moved? Do you think the market reaction in March and early April was justified, or did they react way too much and the price damage is more than what the actual fundamentals warranted?
Markets are grappling with multiple uncertainties at this point of time. First, there was uncertainty regarding the pandemic, whether the world will be able to control its spread and eradicate the virus eventually. Then there is the question as to how long it is going to take for us to get to that situation. Both these questions remained either partially or fully unanswered, in the sense while significant progress has been made across multiple countries and cities through various measures like lockdowns, aggressive testing, quarantining, we are yet to see a meaningful flattening of the curve or what you call the day-on-day change. Of course, it is moderating in select countries, select cities as we speak, but the market is reacting to those data in a very-very volatile as well as significant manner. So we need to recognise that. If you get more positive data, then you would react a little more positively. It is quite obvious.

The second is, when would we eventually see normalisation of the situation. I think that is where markets are still extremely uncertain. There are estimates starting with two quarters to two years about the economic impact of the pandemic. If you go by our last experience regarding global growth shock during the Global Financial Crisis, we saw negative growth for multiple quarters in many developed countries, though emerging countries did not have a significant economic shock. In the current case, we would see no such differentiation; both developed as well as developing economies will have economic shocks. While it lasted five to six quarters after GFC, one hopes it is of similar magnitude and not more in the current circumstance. So in terms of time line, we are probably looking at four to six quarters for the economic situation to normalise.

If that is the case, how does one figure out if markets are already pricing in a complete washout of FY21? Since you referred to the GFC crisis, data for GFC crisis shows the benchmark indices globally and locally fell more than 50% before they bottomed out. Right now we are down 30%. So if this is a crisis which is bigger than the GFC crisis, then the downside has only started and the nightmare is not over?
It is very tough to pinpoint when and where exactly the bottom will be found; it can be 30%, 40%, 50%. It all depends. Just to differentiate between GFC and the current situation, GFC was a financial market crisis which later on became an economic crisis, whereas in the current situation, we have a health care crisis, which is impacting the economy first, and therefore, derivatively it is impacting the financial markets. So there is a nuance there. During the GFC crisis, financial markets got impacted most because, it was a crisis originating in the financial markets, whereas here you would probably see a slightly different reaction.

Having said that, yes there is a danger of calling the bottom too soon. If you look at the time line of GFC, it started in February 2008, but markets actually bottomed out in March 2009. Economies continued to report feeble growth for five to six quarters, and it took more than four to five years for markets to come back the previous peaks, whether it is the US we are talking about or in India. Some of these impacts can last longer than we can fathom or hypothesise at this moment. So we need to be careful on calling out the bottom too early. That is my own learning from previous experiences.

So does one now project returns and plan asset allocation, because as you said if one should not be in a hurry to call a bottom, then one should not also be in a hurry to assume that a new cycle will start automatically after the crisis. Are you making a case that the pain in prices is difficult to call, but the recovery in terms of percentage over next six, 12 or 18 months may not be large, and we are not in for a V-shaped rally or recovery?
Yes, there is a thought process that we will seamlessly move from one bull market to another with a very limited period of correction. We do not have historic data points to suggest such a smooth recovery. Recoveries are painful, they take time, they take significant readjustments and recalibration of economies and companies. Some of the companies will get irrevocably harmed or injured in this process. We also know from past experience that leaderships change, sectors rotate in such situations. But we simply continue from where we had left the last bull market and then extrapolate from there. That is one point.

The second point is, market recovery need not have to be post earnings or economic recovery. Sometimes the market will recover ahead of actual earnings recovery or economic recovery. If the market gets the confidence that we are getting out of the problem, then it is quite likely that stock prices will normalise. Stock prices will normalise not necessarily based on future earnings alone, they normalise based on past earnings, they normalise based on book values or replacement cost. There are multiple valuation parameters, which may be at work before earnings growth kicks in.

So, some amount of normalisation of the market is not contingent upon growth recovery, though I think subsequent growth recovery will be needed to ensure subsequent improvement in stock valuations. Thanks to the correction, the stocks look sufficiently cheap with respect to historic earnings or asset value or replacement value.
Comments
Add Your Comments
Commenting feature is disabled in your country/region.

Other useful Links


Copyright © 2020 Bennett, Coleman & Co. Ltd. All rights reserved. For reprint rights: Times Syndication Service