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Friday, 12 June 2020

Good, Bad & Ugly! How Covid-19 can churn winners on Dalal Street

My article in Economic Times today:


The full text below:

What has happened in the coronavirus case is the media and social media spreading panic and everyone, including governments succumbing to the fear of the unknown. Visuals of thousands of people in hospitals in Italy scared the hell out of people. Even the central banks panicked into throwing unprecedented amounts of liquidity into the system. Now slowly new data and new research will continuously come to light and help us understand how to tackle Covid better; help people lead their lives. All this till a vaccine is found, which may not be very difficult as flu or related vaccines are already available for other coronaviruses.

In the process, with so much liquidity sloshing around and also central banks cushioning the financial ill-effects of the disease to an extent, we could actually see a fair pick-up in the economy. In the US, direct transfer of money to people have fuelled a massive stock market. Whether it is sustained is something that needs to be seen.


The Covid situation has brought our focus back on track on a few important aspects. Spends on healthcare infrastructure and facilities is sure to go up. Preventative healthcare could also see a boost as more and more people understand the issues related to health. Hygiene is also get ingrained into the lives of people.

Another area which was already picking up but has got a major fillip will be delivery based ecommerce and digital payments.

The flexibility of work location or working from home that was seen in some industries will not die away. Some companies will continue with it atleast partially. Even employees may decide to work from home for personal reasons. This can create newer opportunities for the future where more neighbourhood co-working spaces crop up where people in one locality get together and share office space and “work-from-home” for their respective companies. More people working from home or working near home has many downstream effects. Reduced carbon emissions and reduced population density in overcrowded cities assuming that some people would want to shift away to suburbs or tier-2 cities or back to their home towns for a better quality of life.


The first and biggest challenge with Covid is and will continue to be the massive job losses. The economy was just beginning to get back on its feet from the double whammy of demonetisation and GST rollout when Covid hit. The damage this has done to the informal economy as well as the MSMEs is very difficult to fathom. There has been a massive erosion of purchasing power due to job losses, salary or income reductions and income insecurity. Sale of big ticket items like houses, cars may take a while to get back as people get over the psychological damage.

Any time there is an economic crisis there is a clamour for protectionism and socialist & populist schemes. The 1929 Great Depression in US was the reason for the birth of social security in 1935. In India, there has been a discussion around UBI in the last couple of years. During this crisis, the government has started paying Rs 500 by direct money transfer on a monthly basis as part of the PMJDY scheme to eligible women population. If this is continued for long, it can end up as being seen as an entitlement by the recipients. And we all know how difficult it is to take away a grant that has already been given (endowment effect kicks in). This can lead to a permanent drain on the exchequer without a commensurate benefit to the economy.


Prolonged economic stress has a very high chance of leading to social unrest. It can come in different forms and at times may not even be quickly correlated with economic strife.


So, in such a dynamic situation, my focus is on looking for companies that will come out stronger during this period. Companies with good cashflow and strong balance sheets have a very good chance of taking up market share from undercapitalised and weaker competitors. Any sector where demand continues to be strong is a good area to look at. I have consistently maintained since last year that Pharma and Specialty Chemicals will benefit from the current outrage of the Western countries against China. This could be a permanent shift away from China. Personal mobility (both two and four wheelers) could see demand come back stronger than anticipated. Even education as an industry could get majorly disrupted with new business models evolving. We need to keep an eye out for it. There has been very little impact in the rural economy so agri-related business can be looked at.
With nearly all market participants waiting with baited breath for a second wave of downfall, the markets may, like it always does, surprise us. However, we as investors, need to be cautious and remain conservative in deploying our capital for now. If markets remain healthy there will be enough time and opportunity to make money.


Abhishek Basumallick is the Head of the equity advisory www.intelsense.in for long term wealth creation and a pure quant focused newsletter at www.quantamental.in. Nothing in the article should be construed as investment advice. Please do your own due diligence before investing.

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