Post-COVID: What’s next!
“what most people expect is a good thing to bet against”
The optimism in the stock market and the increase in discretionary travel hints at the weakening of COVID fear among the population. A low mortality rate might be the driving factor but is it wise to expect our pre-COVID life back or is there a bigger disaster brewing for us? Are we going to get our Pre-COVID life back or struggle will continue? Let’s take a macro view of the economy.
2+ months of harsh lockdown in an already slowed-down economy sounds like a recipe for recession.
* Recession — A significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales*
So, are we into recession? Let’s analyze the same under 3 buckets -
- The current phase (Jun’20)
- Pre-COVID phase (Jan’19-Jan’20)
- Upcoming phase (Jul’20 Onwards)
1) Present phase
We had a 2 months long one size fit all lockdown. The majority of the jobs in India are provided via micro, small and medium enterprises (MSMEs). These businesses run on credit cycles and having a cash buffer counts under privilege. Below is a rough distribution of industries cash buffer days in the US market.
Source — (JP Morgan Chase Institute)
A lockdown of 60 days would have significantly hit even the conservative deep-pockets across most industries in India. Below is a rough illustration of the job loss in each industry.
Source — CMIE, India
A fair point to consider is that the job loss can’t be taken on face value as jobs are supposed to be back gradually in the “Unlock 1.0” phase.
Only a few FMCG/Pharma is running at 100% capacity. The service industry (TCS, Infosys, etc.) reaping on the hard work done last year of gaining multiple contracts and having a huge business on books. But nothing concrete can be said about other industries. Travel & tourism (~9.5% of GDP) has gone for a toss.
2) Pre-COVID phase
P/E ratios are used to understand the valuation of a firm. P/E ratio in simpler terms means how much price you have to pay to own a company for every 1 Rupee it earns. Below is the P/E ratio trend of NIFTY.
A P/E of greater than 28 is termed costly and needs correction. So, is our stock market really overvalued? Let’s measure it by Buffett indicator (Listed companies market cap/GDP ratio).
Now, a value of ~0.75 denotes a fair valuation. So, on one hand, a high P/E ratio makes it look overvalued whereas, on the other hand, the Buffett indicator shows a fair valuation. This means only selected companies, which are highly weighted in the NIFTY, are driving the P/E ratio of the index to 28. If we look deeper, we find that only the top 20 public listed companies in India contributed to ~70% of the total profit whereas the rest of the companies are hardly growing by 2%.
The automobile industry is at a cyclical low. Financial institutions are struggling with scams and high NPAs (Non-performing assets and loan defaults). Real estate has huge unsold inventory and debt on books correspondingly as well. So, in a nutshell, pre-COVID days weren’t a rosy picture with a declining GDP growth rate.
3) Upcoming phase
The real pain being incurred is unknown to us. Our collective fiscal deficit is expected to go as high as staggering 11.5%, which will not be just a government headache and will drill down upon us and our future generation. The only positive news is rock bottom crude oil prices on which the government is capitalizing marginally by increasing the excise duty, but that is not solely going to help much.
The government would borrow money and cut down on infrastructure spending to fight the crisis. On one hand, where borrowing money will decrease our credit rating leading to a decrease in foreign domestic investment, cutting down government spending will lead to stalling growth. There won’t be any increment in salary/pension resulting in decreased purchasing power. Money can’t be printed as foreign investors will start pulling back their money in Dollar, resulting in the devaluation of Rupee. Overall it won’t be a liquidity crisis but a solvency crisis. If we look at the liquidity interest rate on SBI’s deposit, it’s comparable with the inflation rate resulting in degrowth in the real value of your money.
Moratorium too will hit banks harder on their NPAs whereas they have the obligation to depositors.
“Cutting libraries during the recession is like cutting hospitals during plaque”
Government spending in key areas is crucial and hence the need for funds. The government can borrow any desired amount but the most crucial thing is ensuring foreign investors’ trust in the growth potential of India. This means a significant leeway in red tapes and ease of doing business.
What the country needs to focus more is on structural reforms in place of relief packages which we can’t afford.
Well, it sounds like a scary situation, right?
No! A recession happens at a regular interval in a healthy economy. Economies go through debt cycles and the debt goes down during recession making the economy more efficient.
Recession breeds entrepreneurship. WhatsApp, Instagram, Uber, Slack are big examples.
Regarding investment in markets, is a new bottom coming soon or bull will take us to new heights? No one knows. It’s advisable to have liquidity for 6 months and take a wise decision before taking a swing in markets.
