Nobody seems to be buying the International Monetary Fund’s prediction that the pandemic will lead to lower fund inflows into emerging markets
Dear Reader,
As lockdown 4.0 nears its end, we all want to know whether this one will be the last. There has already been some easing, but we’d like to know whether the lockdown will be extended, especially in the red zones which are the centres of economic activity.
The choice is made more difficult because the infection and death count is not yet under control and our coronavirus death toll now exceeds China’s. Perhaps things would have been better if we had followed Amartya Sen’s advice, but that’s water under the bridge now.
There are two ways of looking at the increasing number of people on the streets. One is to worry about a possible rise in infections. The other is to take it as a sign the economy is getting back on track quickly.
The markets clearly believe the latter is the case, leading to a sharp rebound in the last few days. Nobody seems to be buying the International Monetary Fund’s prediction that the pandemic will lead to lower fund inflows into emerging markets. The explosive rise in central bank assets provides enough fodder for the bulls.
There are some reasons to feel better. There are signs of improvement in petrol and diesel demand. Power demand too is coming back. There is more than enough money for good businesses—Kotak Mahindra Bank’s Rs 7,500 crore Qualified Institutional Placement was oversubscribed more than three times, reversing sentiment for bank stocks.
The key question now is whether consumption will rebound soon. Rather unexpectedly, India’s gross inequalities may help support consumption, in spite of much pain at the bottom of the pyramid. In any case, migrant workers and their ilk aren’t really the consuming classes, although their absence from the cities could push up wage costs.
And then there’s the China factor. Speculation is rife that Indian companies will gain from the current aversion to China. Will the gainers be chemical and agrochemical companies? Will they be in the pharma sector, in aquaculture, or in consumer durables? The beneficiaries could also be auto components companies and capital goods makers. China could also be a source of hope to our steel companies.
On the other hand, there’s a build-up of tensions on the India-China border. And then of course, there’s Donald Trump, the bull trying his best to wreck the China shop. China has signalled that it’s perfectly willing to stand up to the US and it has pushed through a security law to curb protests in Hong Kong.
The markets are so far treating the spat as mere kabuki shadow theatre, occasioned by the impending elections in the US and Xi’s need to consolidate his leadership after the ravages wrought by COVID-19. But things could easily get out of hand.
Despite the market rally, there is no shortage of voices urging caution. The newbies trading in demat accounts opened during the lockdown, for instance, need to be careful. Remember, all is not well even in the defensive FMCG industry. But then, neither is staying in cash a good option.
In this environment, what investing strategies will work? With so many companies unable to give forward guidance, stocks with strong earnings visibility should be good picks. So are those where the impact of COVID-19 is factored in, or those best placed to withstand the turmoil. We could also examine whether firms with more rural exposure would fit the bill. Then there are good but expensive stocks, where you should wait for a correction before buying for the long-term.
The March 2020 quarter real GDP growth number beat estimates at 3.1 percent. But how economists are arriving at their estimates is a mystery, given that even the government has said that the data they have based them on are incomplete and subject to revision. The last few days of the quarter were under a nationwide lockdown.
The March quarter GVA (Gross Value Added) growth came in at 3 percent, buoyed by agriculture and government spending. If we exclude agriculture, growth in the rest of the economy was just 2.5 percent. If we exclude agriculture and government spending, then the growth in the private sector non-farm economy was a mere 1.1 percent. And, for what it’s worth, real consumption growth was a meagre 2.7 percent year-on-year in the March quarter. If this is the situation with just a few days of a lockdown, consider by how much GDP will contract in the June quarter.
But then, all this is backward looking data and the markets are determined not just to ignore it but also to disregard the weakness for the entire current fiscal year, looking forward eagerly to FY2022.
All this optimism has been extremely trying for the bears and even a perma-bear like Societe Generale economist Albert Edwards seems to be having moments when he feels like throwing in the towel.
This is what Edwards wrote in a recent note: ‘I feel I am suffering from that awful psychological affliction virtually unknown on the sell-side – namely self-doubt!’
Cheers,
Manas Chakravarty
