Moneycontrol Pro weekender | Apocalypse Postponed

Dear Reader,

The markets seem desperate to rebound. April was truly the cruellest month, but only for the shorts. By month-end, the Street was littered with the corpses of bears ripped apart by the rally.

Several reasons are being cited for the resurgence of the bulls. The most obvious one is that the sky isn’t falling after all and thanks to central banks and governments rushing to the rescue, the Apocalypse has been dodged. Whether it has been dodged or kicked down the road is a debate for another day, but the markets seem to have decided that the fast and furious government and central bank bailouts and programmes will do the trick. Another reason for optimism is the ‘flattening of the curve’ in Europe and the US. A third is the lifting of the lockdowns. And the baking powder for this cake, the one that made it rise last week, was the endorsement of antiviral agent Remdesivir by US anti-covid czar Anthony Fauci.

The data on the economy continues to be uniformly putrid. US GDP for the first quarter shrank by 4.8 percent and the unemployed there are now 30 million strong. China’s economy contracted by 6.8 percent in the first quarter compared to a year ago. The International Labour Organisation says globally 1.6 billion workers in the informal economy are in danger of losing their livelihoods. The US Fed put it pithily: ‘The ongoing public health crisis will weigh heavily on economic activity, employment, and inflation in the near term…’. And just in case we wanted to ignore the near-term, as the markets seem intent on doing, the Fed added that the crisis also ‘poses considerable risks to the economic outlook over the medium term.’

Perhaps the disjuncture between the financials of companies and the markets is best illustrated by aircraft manufacturer Boeing, one of the worst affected by the pandemic. S&P Global Ratings has lowered its rating on the company’s debt to BBB-, the lowest investment grade and reports say it could even be downgraded to junk. But the company managed to raise a monster $25 billion in a bond sale and reports say it received bids worth $50 billion.

Back home, the Reserve Bank of India finally came to the rescue of the debt funds, but there are plenty of questions whether its strategy of getting the banks to lend would prove successful, especially as banks have turned not just risk-averse, but risk-phobic. The problem, after all, is not just of liquidity, but of solvency. This is clearly going to be a major issue, which is why attempts are being made to push the bankruptcy law into cold storage. It is the reason why Axis Bank has prudently made large provisions for possible bad loans.

India Inc’s profits are going to take some very hard knocks. A report by rating agency ICRA says several AAA-rated companies have also sought payment relief from lenders. Clearly, the time for a bailout is now. The question is: what on earth could be holding the Godotment Government back? We have been hearing about a bailout package for small scale industries for weeks now---an extraordinarily special package must be in the making, because if it wanted a run-of-the-mill one all it had to do was emulate the countries that have already announced such programmes.

Everybody is waiting for the much talked about staggered lifting of the lockdown, which has taken a severe toll on the weaker sections of the population. The plan is to colour code districts into green, orange and red zones and open up the green zones forthwith. It’s a better idea than opening up entire states, as is being done in the US. As one US public health official put it, reopening some states is ‘like having a peeing section in the swimming pool.’ He meant that if the virus recurs, it won’t stay where it started. Be that as it may, unfortunately in India, it is the red zones that account for the bulk of economic activity.

In spite of the strong rally, the market has not thrown all caution to the winds. The NSE realty index, for instance, is still down 44 percent in the last three months, the metals index is lower by 35 percent, the auto and bank indices by 32 percent each. The BSE Capital Goods index is down 33 percent. It is the Pharma, FMCG and IT sectors that have done relatively well.

But perhaps looking at sectors is the wrong thing to do. Instead, as Kenneth Andrade, our guest at MC Pro Masters Virtual Meet said, it may be best to pick out the most resilient companies in every sector. Our team of independent research analysts, for example, picked out this firm that can take advantage of the fact that glass-lined equipment forms around 10-12 percent of pharma capex. We compared firms in the insurance sector to find out which one investors should back. We took a look at a company that could be a potential beneficiary of a trend India is trying to take advantage of -- shifting the supply chain from China to our shores. And we also considered which equity funds came up trumps during the market mayhem.

Finally, a word about China, because it has more or less recovered from the virus and it is supposed to tell us how the recovery is going to be like. Well, China Beige Book International (CBB) said that by late April, 91 percent of Chinese companies re-opened shop, but over two-fifths of them were unable to operate at more than 50 percent capacity. The Caixin China General Manufacturing Purchasing Managers Index for April came in at 49.4, compared to 50.1 in March. That indicates after massively shrinking in February, Chinese manufacturers were barely able to keep their heads above water in March and slipped back into contraction in April.

Commenting on the data, Zhengsheng Zhong, Chairman and Chief Economist at CEBM Group said, “To sum up, the sharp fall in export orders seriously hindered China’s economic recovery in April, although businesses were gradually getting back to work. Amid the second shockwave from the pandemic, the problems of low business confidence, shrinking employment and large inventories of industrial raw materials became more serious.” The lesson: Yes, there will be a bounce from the lows, but getting back to normal is going to take time.

Cheers,