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Saturday, 9 May 2020

Thoughts on Markets

Tussle between Bulls and Bears

Currently, there is a boxing match going on between liquidity & low-interest rates on one hand and business and economic uncertainty on the other. In March, round one had gone to uncertainty and in April, in round two, liquidity won. So, right now, round wise we are 1-1 but uncertainty had struck heavier blows and has more points (the market is down more than up)! 

Just to understand the liquidity situation, let’s look at what is happening around the world.
  • US: $5 trillion stimulus package announced. Roughly, 25% of GDP.
  • UK: GBP 500 billion stimulus package announced. Roughly, 25% of GDP.
  • Eurozone: Euro 3.2 trillion stimulus package announced. Roughly, 24% of GDP.
  • US: Yen 108 trillion stimulus package announced. Roughly, 20% of GDP.
So, both sides are strong and it is not very clear who will win the next few rounds. 

The central banks globally are using their 2008 playbook and have jumped in very quickly to the rescue. That is why even Warren Buffett is sitting holding his 130+ billion dollars of cash. But no one is calling to offer him great deals that he got in 2008 because the guys who need the cash have now got it from the central banks in some roundabout way.

Compare this with what the Indian government and RBI has done for the industry – practically nothing. And unless some significant measures come in, India is going to have to pay for the consequences for a long time. 

The Way Forward

I am of the opinion after speaking to a large number of business owners over the last few weeks that the next 1-1.5 years will be extremely tough. The level of uncertainty is only going to go down as and when a vaccine is found and is delivered to the masses and is effective in preventing a further outbreak. Till then we are going to be wary of the circumstances. The more the duration of the lockdown goes on and the more social distancing norms gets mainstreamed, the more persistent behaviour changes are likely to be. The scars of this event will be there for a fairly long period in my opinion.

The urban salaried and business class are likely to be badly affected with reduced income from salaries or businesses. This is likely to have a negative impact on discretionary spending. So, sectors like real estate, both residential and commercial; 4 wheelers, luxury items, leisure travel are likely to be hit much longer than people are currently factoring in. 

Another area of concern for me is how the startup space will play out. The “thin-air” valuation model is likely to come under severe scrutiny and make way for more profitable and cashflow oriented business models. The concern is that in the last few years, the bulk of incremental jobs in India, especially at the lower end of the spectrum, has come from these “non-profitable” enterprises (the likes of Oyo, Swiggy, Zomato, Ola, Uber, Flipkart, Amazon, Paytm etc). Impact to such businesses would mean a chain reaction and lead to joblessness. 

Civil Distress

History tells us that severe economic contractions most of the time lead to social unrest, civil wars and even full-scale wars between countries. I am not suggesting we would have it this time around, but we need to be aware of such an outcome. Already social tensions have started rising and with more duress in daily life, it is likely to escalate. The government does have a significant role to play in this through various social schemes. 

Silver Lining

Some areas which give me comfort is that a very large section of Indians depends on agriculture and that has been the least impacted in the crisis. With, hopefully, a good monsoon, we should be able to see rural demand coming back.

Another silver lining is the reset in labour laws that states are now resorting to. Times of crisis such as these are great opportunities for policy reset which is particularly difficult to get done during normal times. Labour and land reforms are the two most critical issues that have been holding back Indian industry and any progress on these should be welcomed. 

In times like this, it is better to remain cautious. There are 3 positions an investor can take in the market at any time – i) be a buyer, ii) be a seller and iii) wait outside. 

Now seems a good time to be waiting outside.

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