1 Aug 2020
India witnessed its steepest decline with June end GDP growth of -23.9% YoY due to the covid-19 pandemic and the lockdown enforced to save lives which adversely impacted livelihood across sectors. Except for the agriculture sector which showed a growth rate of 3.4% YoY all other sectors witnessed sharp de-growth.
We don't have the luxury of the developed world to spend money by increasing fiscal deficit without consequences from rating agencies. The current crisis needs to be overcome through bold reforms to change the orbit of India's growth. In this regard, supporting our Abhimanyu's (entrepreneurs) to break the chakravyuh of un-competitiveness is important. We need to lower logistics cost by removing subsidy of passenger fare from freight charges and lower power cost by removing subsidy of free agriculture power from industrial power. Roll out the red carpet model of Sanand where Tata Motors could set up a plant at a record pace for firms shifting out of China. Our benchmark should be to encourage global companies to prosper here, just like Vietnam, where Samsung contributes to over 28% of its GDP with a $62-billion turnover.
India can raise additional resources by monetizing its assets (Rs 1 trillion) held under 'custodian of enemy property'. Similarly, the Indian government can undertake strategic divestment of PSUs to unlock value. The government can also seek to monetize gold holdings by incentivizing its financialization.
There are also some suggestions that government can monetize the fiscal deficit. In our view, the same effect can be obtained by increasing money velocity. That is: the government can look at increase credit offtake by banks and financial institutions to improve circulation and boost demand in the system.
Our strategy should follow what former UK prime minister Margaret Thatcher did to turn around the economy through privatization and cost-cutting. Create a separate judicial infrastructure for faster resolution of commercial disputes. Rule of law is a prerequisite for entrepreneurs to invest.
In short, the government's focus on ease of doing business has to be in mission mode. India's entrepreneur is an Abhimanyu fighting in the Chakryvuh of regulations. The government will have to become a 'Saarthi' to this wealth creator and bring his / her projects out from this Chakravyuh.
Nifty is looking strong in a scenario when GDP is contracting. It's because a bulk of the up-move has happened due to only 15-20 stocks taking the lead. Avery wide polarisation between companies is seen and which is where one can see the pain of the economy is reflected in the bottom 35 stocks of the Nifty 50.
The market is expecting a medical solution in a couple of months and a resumption of economic activity. The market also believes that by then the impact of monetary and fiscal measures will begin to translate on the ground. High capital flows, low oil prices, a good monsoon are among the factors which can make one hopeful about the future and the market is looking ahead with optimism.
The key thing for the market is to maintain its momentum. If normalcy returns to economic activity, then the broad market will continue to move forward. But if normalcy does not resume and we go back to a situation of a start-stop kind of model, then probably defensives will continue to outperform the market. In my opinion, the biggest factor to influence the market will be how the medical situation develops in India.
From an investment standpoint, we are neutral on equities, though there is scope for being selectively opportunistic. Pharma and IT stocks are likely to outperform for some more time. The government has taken many initiatives to popularise Make in India, and we believe there are two particular sectors -- chemicals and contract manufacturing as well where there could be a stupendous opportunity, just like the IT sector in 2000. Also, as government policy is unveiled for the electronic sector, electrical sectors, and defense sectors, we will see an opportunity arising in those sectors as well, depending on how things get executed on the ground.
But, investors who have put their money in penny stocks must be watchful as a lot of them have run up probably without the backing of fundamentals and merely due to increased participation.
In closing, a good financial advisor enables the investor to ride through this sentimental wave and helps them emerge better off over the business cycle. We believe that IAP has increased investor's financial knowledge. IFAs must leverage this rising awareness and keep their investors' base steady to help them gain from a better future ahead.
Distributors can also add value by suggesting prudent asset allocation to their clients. Prudent asset allocation will be critical in helping ride out this period. Equity overweight investors can consider a dynamic asset allocation strategy. A BAF strategy that has low downside risk and higher upside potential provide a good investing option. Conservative investors can consider a debt hybrid strategy where the equity component is 25% or less. This strategy keeps the equity risk limited and allows for the debt component to anchor the investment and keeps volatility low and the equity component may deliver when equity markets enter a bullish period.
We had been suggesting investors look at Gold allocation since the beginning of March 2020 as we believe it is likely to do well. We are still bullish as central banks continue to cut rates and pump liquidity. Gold ETFs across the world have received significant flows and today Gold ETF inflows are higher than equity ETF flows.
On the debt fund side, we had been suggesting investors not to redeem in good quality credit risk funds as it was an opportune time to stay invested. Please go through the performance of our credit risk fund in this factsheet to see how investors who stayed invested have fared. Investors can invest in Medium Term from a 3-year perspective as the current elevated credit spreads provide an attractive opportunity to invest. We believe that it is time to belong on the duration for those willing to live with a little more volatility and have 3 years plus horizon.
