Moneycontrol Pro weekender | Will April be the cruellest month?

Dear Readers,

‘April is the cruellest month, breeding

Lilacs out of the dead land, mixing

Memory and desire, stirring

Dull roots with spring rain.’

------TS Eliot ‘The Waste Land’

Those lines by TS Eliot are probably one of the bleakest descriptions of spring, very apt for the current mood in a world reeling from the the coronavirus (COVID-19) pandemic.

That mood is reflected in the Purchasing Managers Indices (PMI) across countries, most of which are seeing their economies contract, as the so-called ‘social distancing’ measures and lockdowns affect business.

The services sector has been the worst hit. Consider, for instance, the services sector PMI in Italy, which plunged to a record low of 17.4 in March, down from 52.1 in February. A reading below 50 indicates contraction from the previous month, while one above 50 denotes expansion. Even Germany and Japan, countries that have managed the epidemic relatively better, saw their services sectors shrink substantially in March. A steep recession in much of the world is in the offing.

But we all know that. What we would like to know is what will be the shape of things to come. We are not soothsayers, so all that we can do is look at examples of similar crises in the past. For example, we looked at whether the current crisis is as bad as or worse than the 2008 global financial crisis, as the IMF has said. Indeed, we went a step further and included the tech bubble of 2000 too in our comparisons.

When will markets bottom out is another frequently asked question. We looked at several indicators, drawing parallels from previous crises. Our conclusion: investors shouldn’t try to time the market. We also considered what would happen if the markets followed the 2008 playbook.

What then should investors do, apart from lighting candles on Sunday? They must put the market crash and the bear market rallies to good use. They must consider making gold an important part of their portfolio. They could look at fallen angels. Companies in the front lines of the fight against the coronavirus are good picks. We looked for value in the most beaten down sectors. And, of course, we continued to back defensive stocks here and here. We also warned investors to be cautious, as liquidity has dried up in our equity markets.

But all eyes are now on China. Since China was the first to get the epidemic and the first to emerge out of it, conditions there will reflect what will happen to the rest of the world a few months later, so goes the argument. China’s PMI for March, however, shows no V-shaped recovery, but rather a stabilisation around the February levels. We considered the lessons for India from China’s stimulus measures and the impact on supply chains in India now that the Chinese economy is recovering.

Policy makers across the globe have reacted rapidly to the crisis, throwing billions of dollars at it and taking steps to protect jobs and the masses. Our own Reserve Bank of India (RBI) has made a commendable effort, which will benefit several sectors. At the time of writing this, a commensurate fiscal stimulus package from the Indian government is still awaited.

As we near the end of the nation-wide lockdown, we’re all wondering whether it will be extended or whether the time is approaching for a managed exit from it. After all, the lockdown has severe costs, especially for small businesses and the many firms that are highly indebted. Layoffs and salary cuts have already started. The US ambassador to India has reportedly told colleagues that they are looking out for signs of civil unrest. A fiscal package is desperately needed. And we have to prepare for a 'staggered exit’, as the PM has suggested.

While markets continue to grind lower, there are signs that the liquidation frenzy is over. The US Vix as well as the India Vix have come off their highs. One reason is the extraordinary response of governments and central banks in most countries. But this time, unfortunately, while man proposes, the virus disposes.

I leave you with a little philosophy to keep us calm in these trying times.

Cheers,