Our FM Nirmala Sitaraman responded to the lockdown with an immediate short term pain alleviation program for the poor. The food cum money combo is a good start, and I am sure no government would fire all cannons in one shot, but wait and monitor the situation. Given the population to be covered, the per capita amount of assistance may be small, but we must remember that this is a battle for survival,
and not a survival of the fittest.
We are now in the contagion phase, and the period up to 5th April becomes crucial as the incubation period is over. The next few days may show a sudden increase in the number of positive cases. All efforts to maintain social distancing are critical in this period. Any laxity for whatever reason would unleash another massive jump in numbers.
The Indian stock market is another animal by itself. It suddenly woke up to say that a 40% correction was too much, so when most brokerages are operating on skeletal staff, it rebounded with vigour and recovered 35% of the fall in three days! The recovery coincides with the PM announcing a 3-week lockdown and the FM announcing an adhoc unbudgeted spend (it may be interesting to note that our budgets don’t plan for contingencies). The relief in shareholder mood is so palpable that the mind is numbed. What’s the reality here??
Indian markets were grossly overvalued vis-à-vis their peers. Corporate India was displaying very weak profitability, 1.5% of GDP as compared to 7% in the USA. This reflected lack of pricing power of the Indian corporate sector and was corroborated by repeated failure to meeting earnings growth forecasts – but who wants to demolish the feel good factor?? The markets took a year to make a classical rounding top pattern reflecting distribution of stocks from strong hands to weak hands. Wealth managers competed to sell mindless rationale as to why the bubble would sustain, and the gullible happily lapped it up. Can anyone remember any AMC or Fund House say there is too much froth, and we are moving to 60% cash? AUM fees are more important, investors be damned. Did any Regulator warn investors of heightened risks, or start increasing margins in the futures markets? Everyone including the ruling political dispensation wanted to brag about the rise in the Sensex!
So what really ailed the Indian economy in the pre Corona era and will any of it change now?
- Private demand and consumption had started to slow down and veiled warnings by the leading
consumer companies were ignored. - India’s exports have stayed static for several years, and instead of blaming trade wars, we need
to understand that domestic markets are not large enough to absorb manufacturing capacity in
most industries. - Investment in residential real estate came to a grinding halt post the demonetization phase.
- Fresh Capital Expenditure as a corollary dropped to all-time lows.
The active Corona scenario has added the following to the mix:
- A one-time reduction in current year’s GDP for the period of the shutdown, and a further drop
till capacities revive to pre Corona levels at least. - Collapse of world trade in non essential product categories due to stoppage/ restrictions in
transportation. - Heightened currency risks in all net importing markets.
- Permanent loss in employment in the unorganized sector to the extent units/ businesses find
their models/markets unviable to restart, or lack the financial wherewithal to start. The self
employed sector is the largest sufferer, as no government aid package covers them. - Long term damage to the Aviation and Hospitality/Tourism industries as they will face a
customer aversion to travel for some quarters at least. - The world economy was in an unrecognized recession pre Corona, but now its writ large:
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- Concerns are what if it’s not a V shaped recovery from the lows
- Will China which consumes 40-50% of all global commodities also move into a
recession. - Italy/ Germany were already in a recession before the crisis, and Germany more
at risk with its huge supply chain exposure to China. - Will major global corporates maintain concentrated manufacturing risk in China,
or look to diversify their bases, leading to delayed recoveries in capacity. - Will crude stabilize at $30-35, or go back to 50+ levels.
Market indices hardly reflect the true carnage in shareholder wealth as globally few large illiquid stocks are used to manage the fall. However nearly 90% of the market is below 2008 levels, and the Sensex post 2008 has a CAGR of 6-7% p.a. This is lower than the fixed deposit rate offered by banks where your capital is far more secure, and no recurring fees would have to be paid to fund managers.
Where do we go from here?
The pain is certainly not over for the next three weeks till the actual Corona related outcomes become clear numerically. The risks associated with migrant labour going back to villages pre lockdown and remaining undetected due to woeful medical infrastructure cannot be wished away. We all pray that the gods are kind to us as a nation, and ensure that discipline is maintained in the next few weeks.
The knee jerk market correction in terms of pace of fall I feel is tangibly over, and perhaps a last leg remains. Hence is it a good time to jump in??? I hear a lot of investment gurus saying that this is a great time to buy, but each person must decide his own risk appetite. The days of easy money are over. Brands that you trusted with your money have largely failed you, it’s your hard earned money, and it
demands your personal time too.
The next quarter has far too many unknowns in the global economy. Just because the cost of capital has come down, and money availability to large borrowers made much easier, do not expect that they are primed to jump in. The ones who mattered could have raised money earlier too, and for others with failed models, this may only extend the period of impending demise. Globally governments will have to do the heavy lifting and ballooning fiscal deficits will be the order of the day as every country rushes to print cash. We will be watching carefully on revival in consumption as the first lead indicator for a mentally feel-good factor.
I will continue to write and update my views regularly as more data points emerge. I will also attempt to highlight issues that we have often glossed over.
Sanjit Paul Singh
Managing Partner S&S Associates