Covid Scare Pushes Credit Suisse to Trim Nominal GDP Projection

Credit Suisse has decreased its nominal GDP growth prediction by 150-300 basis points to 13-14 per cent, citing the impact of the second wave of the pandemic on the economy and consumer sentiment. Better recovery is expected in the second half since the lockdowns have little impact on tax revenues.

Neelkanth Mishra, Co-head of equity strategy for Credit Suisse Asia Pacific and India equity strategist, told PTI last month that he expects real GDP to dip to 8.5-9 per cent in FY22 because of the pandemic getting worse. The virus caseload has surpassed 25 million, and the death toll is approaching 2.9 lakh, making it one of the highest in the world, as the test positive rate has remained around 15 per cent for a long time.

"Our macro strategy team expects the overall impact on the pandemic restrictions on GDP to be about 150 bps in base case scenario. Even if we assume a 300 bps impact if statewide restrictions prolonged, nominal GDP growth in FY22 can still be around 13-14 per cent," as per Premal Kamdar and Jitendra Gohil, equity analysts of Credit Suisse Wealth Management India.

Recovery will be aided by pent-up demand, although at a lower level than in the first wave, and the rub-off effect of global growth, as the developed market could see quicker growth boosted by vaccination campaigns, they said.

Though localised lockdowns may impede the easy movement of goods and supply chain bottlenecks will postpone the industrial sector's recovery, they expect pent-up demand to underpin growth in the second half. The fact that the virus is now spreading in rural regions, though, is a cause for alarm. Another plus is the favourable monsoon forecast, which, if realised, will make this the third consecutive healthy monsoon season. This is good news for the agricultural economy, and it will assist to boost rural demand more quickly, according to the experts. They also predict that the impact on tax collections will be limited, owing to better compliance and the pleasant impact of greater inflation on overall tax collections.

They are bullish on the market because the MSCI premium on domestic shares is presently only 5 per cent, down from an average of 8 per cent in the past. As a result, they do not expect substantially sharper decreases in profit forecasts. Local equities have outperformed the MSCI ex-Asia Japan index by 7.6 per cent in dollar terms since April, indicating foreign investors' unwillingness to abandon local equities.

FPIs have sold only $2.3 billion since April, but this outflow is modest compared to net inflows of $35.1 billion in FY21, and their recent selling has been somewhat offset by a pick-up in buying by domestic mutual funds and resilient retail flows, which doubled to $736 million in April from $339 million in March. Given these factors, they continue to favour mid-caps over large-caps and remain positive on equities with a cyclical bias.

Domestic equity indices outperformed major indices in FY21, with the Sensex rising close to 60 per cent, although it gained 1.5 per cent in the past 30 days and lost 4.1 per cent in the past 90 days.

On the other hand, MSCI AC world gained rallied 45.5 per cent in the past 12 months and lost 2.8 per cent in 30 days and lost 9.2 per cent in the past 90 days. The same for S&P 500 was at 45.4 per cent, -0.5 per cent, and  -5.9 per cent;  Euro Stoxx 50 stood at 44.6 per cent, -0.6 per cent and 8.3 per cent; MSCI EM at 45.5 per cent, -2.8 per cent and -9.2 per cent; MSCI Asia ex-Japan is at 42.3 per cent, -3.8 per cent and -11.3 per cent; As per the report, MSCI China stood at 30 per cent, -4 per cent and -18.8 per cent; Nikkei 225 gained 38.9 per cent and it lost -6.3 per cent for the last 30 days and -8.1 per cent in the last 90 days.