We came into the week gone by feeling that the market was unjustly ignoring the poor macro data all around us. Top economists had just cut their gross domestic product (GDP) growth forecasts quite sharply. But as the week came to a close, a spate of government decisions has made sure that the mood and sentiment are a bit better.
The lack of a legal resolution framework for non-banking finance companies (NBFCs) that have defaulted was finally addressed by the government when it extended the Insolvency and Bankruptcy Code (IBC) to also include the financial sector. JP Morgan believes that "this will go a long way in ensuring maximized residual value and reduce risk premia because lenders will have more clarity/certainty of a resolution mechanism in case of a failure."
The deep in stress telecom sector got some relief when following Bharti Airtel and Vodafone Idea, Reliance Jio indicated it will take measures in coming weeks to appropriately increase tariffs. BofAML's telecom analyst wrote in a note, "We also expect incumbent telcos to follow and take another round of hikes in coming months." The government also stepped in with relief a two-year moratorium on spectrum-related dues. The telcos though, are expecting more. There will also be a review application in the Supreme Court against the Court’s own adjusted gross revenue [AGR] judgement.
Pushed against the wall on the fiscal front, the government has announced a major strategic divestment push. It said it will sell its entire 53.3 percent stake in BPCL. As of September 2019, the government had collected Rs 12,300 crore via divestment as against its full year target of Rs 1.05 lakh crore. The sale of BPCL, which should fetch around Rs 55,000 crores at today's prices, along with the sale of stakes in four other PSUs, the state should be able to meet its divestment target for the year.
>> EIL, SAIL, NMDC, BHEL, NHPC likely to be in govt's stake sale kitty
Adding the above three decisions with last week's Supreme Court judgement upholding the seniority of secured financial creditors, and one can see why financial market participants are feeling a bit more confident. Government actions have bolstered sentiment and sent out a reformist signal.
The question though is, will this be enough to see us through what still remains a very tough earnings and If corporate India remains so cautious, can investors be faulted to behave in a similar manner? Investors continue to take comfort in the safety of largecaps, driving up the Nifty's premium to the midcap index to almost 30 percent against an average premium of 10-15 percent. While investors recognize that largecap valuations are at an extreme, most may wait for the first signs of an economic recovery to show up before taking a decisive call on the broader market.
economy picture. Feedback from companies we speak to tell us that while steep discounts and offers got the consumer back during the festive season, demand has not sustained beyond it into November.