1 Apr 2020
We are experiencing a perfect storm right now. Corona is the kind of medical crisis not seen since 1919. It has created global upheaval not seen possibly since the 1940s. And has caused a financial crisis not seen since 2008.
India's response to the containment of Coronavirus has been appreciated globally. In many ways, our measures are being considered as a benchmark. Now as we enter the third round of lockdown, our challenge will be to restart the economy.
The impact of lockdown has been different in different sectors. Aviation, Hospitality, Entertainment, Retail have been hit hard. On other hand, agri and agri-related sectors are seeing a lesser impact. The demand is getting re-prioritized across the board. The resultant slowdown is likely to squeeze GDP. Early calculations suggest a monthly loss of around US$ 125 bn assuming a 50% drop in economic activities. For 45 days lockdown, the loss of output could be $ 190 billion + the cost of restarting the economy.
Luckily, the savings from low crude oil prices are likely to cushion us by about US$ 40-45 bn if oil persists at its current low level. The trade deficit with China can be reduced by US$ 20 bn by replacing made in china goods with made in India goods. The government will have to plan for a shortfall of around US$ 130 bn plus the cost of restarting the economy for a 45 days lockdown. FDI, plus monetary and fiscal stimulus must come in to fill this gap. The good thing is India has a lot of underlying structural strength.
For one, our forex reserve kitty provides a strong cushion. At that, we have low foreign borrowing as a percentage of GDP. Even our public debt ratio to GDP is not as high as other peers. And, the cost of borrowing too has come down. Altogether, this gives us sufficient policy headroom to conceive and execute a response to the crisis.
The US Fed reserves and ECB have already come out aggressively. US Fed has built a war chest of US$ 2 tn to fight the economic fallout. The ECB also created a euro 750 bn fund to fight the fallout. Globally, we are seeing liquidity easing and fiscal packages doled out to manage the stress.
The opportunity India has is of filling the shoes of China. Already, global textiles, lifestyle, leatherware industries, etc are looking to move out of China. Now our capacity to cater and adapt will decide our benefit. Many Indian states are developing their policy to meet this opportunity. As per some reports, around 4.6 lakh hectares of land is being developed for industrial development.
Equities markets are likely to sway like a pendulum to the news flow on medical solutions for Coronavirus, fiscal and monetary stimulus While There are early signs of a breakthrough in drugs as well as vaccine for coronavirus, we must prepare for the possibility that vaccine/treatment may come late. Or, we may have to learn to live alongside this new virus. If we get the vaccine soon with an appropriate fiscal and monetary stimulus, then we may see a 'V' shaped recovery. Else if the vaccine news comes later and stimulus is lower than needed we can see an 'L shaped economic recovery
FPI selling along with liquidation of leveraged position led to a sharp correction in March 2020. The market cap-to-GDP fell to 47 % of GDP at 7600 NIFTY before bouncing back to 54% currently
The Nifty PB is now trading 20% lower than its long term average. Nearly 360 companies (of the top 1000 Nifty companies) are trading at less than P/b of 1.
This positions the long-term investor to buy good companies at attractive prices. There is the anticipation of buying coming back. For one, the FTSE and MSCI indices are likely to see a rejig. Due to this, the index-tracking FIIs are expected to invest Between $ 3 to $ 8 bn by Aug 20.
We believe that it is time to be cautiously overweight on equities. Economic activity may pick-up pace in days ahead. Market history with SARs, Bird flu, etc suggests that the market has bounced back sharply after epidemics have receded. Hopefully, this time to we shall see the same.
An investor may invest half of their incremental investment in a staggered manner in a falling market when it is in fear mode due to the uncertainty of the virus. The other half should be invested when the market is in hope mode with the emergence of medical solutions.
Gold as an investment opportunity too looks attractive in the current market. Very recently, in Feb-20 we gave a call for investment in gold. That call has gone right in the current scenario. We continue to believe that with a low-interest rate and high liquidity, gold is likely to perform well. Gold ETF/Gold FoF may be an avenue through which gold can be invested in.
On the debt side, a mutual fund peer froze some of their debt funds. This has caused panic and uncertainty in many distributors and investors. But here is the time that we stop emotions from clouding our judgment. The liquidity flushed market (~7 lakh cr) is providing very attractive investment opportunities for investors.
Despite high-risk mandates in various categories, we have been running good quality portfolios within the ambit of that regulation. Strong Promoters, Cash flow backed business, liquidity, and asset security have been key to our investment ideas.
The current market is offering an attractive risk-return ratio in high-quality companies. Our incremental investments are happening into these high-quality companies. Thus, our portfolio quality may only further improve going ahead.
Our conduct in 2008, 2013, and 2018 has clearly displayed that we keep investors first. Our conservative DNA and our transparent and constant communication are aimed at gaining and maintaining that confidence.
Please stay safe and stay invested
