Once again, India and the world are in the face of a crisis like no other. The coronavirus, originating from Wuhan, China has now shut down most of the world economy, taken a death toll of over 150,000, infected more than a million people, and has left all of us in a state of panic about our lives and the economic machinery.
Immediate Impact
This extreme crisis has put the economy at a standstill, with consumption going down by 50-70%, industries shutting down and unemployment at peak. The GDP of all major nations is projected to go down drastically this quarter and the recovery is still out of sight.
All major markets had a 25% drawdown in March, with most of them breaking the fall after the 23rd March US Federal Reserve Stimulus announcement.
Impact on Indian Economy
Indian Economy which was already very fragile with falling GDP numbers and financial sector crises before the virus, has come to a standstill with the 5-week lockdown imposed by the government.
The Indian government has been very proactive in containing the spread of the virus but obviously, a shut down has halted the economy. The small and medium industries, migrant workers and the unemployed are very evidently facing the brunt of this shutdown.
Goldman Sachs in their latest report has cut down India’s GDP forecast to 1.6% from 3.3%. arguing that the steepest hit will come from the transportation, education, restaurants, and recreation sectors. They also argue that the global GDP will shrink by -2%, the US by -6% and Europe by -9%
Goldman Sach`s estimation of the sectoral impact of the shutdown
Economic Recovery
China, which has apparently been able to almost contain the virus, is making a quick, almost V-shaped. According to a report by BCG, the Chinese economy is beginning to show signs of recovery with almost 99% of businesses resumed. The consumer spending patterns have also shown a great uptick from the same numbers a month back.
This gives a ray of hope to the rest of the world in these uncertain times. While experts at New York Federal Reserve expect the healthy US economy to make a V-shaped recovery, the fragile emerging markets could still have a difficult time ahead.
Indian economy is at the bottom but what is going in our favor is that the Indian economy is fiscally independent and healthy. The crude price crash has also been in our favor.
The RBI has a war chest of $476.5 billion in foreign exchange reserves that have risen nearly $2 billion from prior years. The INR has also not done as bad as some of the emerging market currencies due to this prudence
The economy would still need a quick staggered restart and a stimulus in terms of policy changes in favour of healthy small businesses, liquidity boost, and easing of financial balance sheets to make a recovery.
The Government has given a targeted stimulus of 1.7 trillion till now and allowed some key parts of the economy like farming, infrastructure, logistics in less infected zones to return to normal. The RBI also gave a slew of measures like reducing reverse repo rate, targeted long term repo operations to benefit NBFCs and microfinance institutions. They are also easing pressure on public sector financing and strengthening lenders’ balance sheets through targeted measures.
Short Term Market Impact and Where We Are Investing
Among the broader asset classes available, while bonds and gold have been outperforming since the crash, large-cap equities seem to be on the way back up. Midcaps and Smallcaps are lagging the larger stocks. International markets are outperforming domestic markets at this point. Even with last week’s uptrend, we see volatility coming back with supply and demand shocks like reduced demands of automobiles, real estate, and luxury goods, and increased pressure on the healthcare and e-commerce sector when the economy recovers.
Among the market sectors, Healthcare is the top-performing sector followed by FMCG and Energy. The Financial sector seems to be the worst hit during the crisis.
Among Styles or Smart Beta Equity Factors — Value, Low Volatility, and Efficiency are outperforming Momentum and Growth factors at this moment.
We are choosing to be hopeful in these uncertain times. Even though short term volatility is inevitable, the recovery from this natural disaster whenever it comes would be euphoric. The market and the economy in our opinions are at the bottom and the focussed global effort to fight this pandemic is a positive sign for the world. We do not see panic selling in the near term but a sideways market until the situation is controlled in a significant way.
Our portfolio recommendation is a moderate risk portfolio with up to some allocation to bonds and gold along with some exposure to international markets. Among equity, we like stocks with value, efficiency, and low volatility exposure, preferred sectors are Healthcare and FMCG.
