Economic Crisis – What lies ahead

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The Sensex continued its momentum almost throughout 2019 and hit an all-time high of 41,804 while Nifty touched 12,169 on the last day of the year 2019. Mid-cap and Small-cap stocks were in a growing phase and everyone was hoping that 2020 will be that year for Mid and Small-cap stocks to rebound amid the economic slowdown, Gold and Silver witnessed a decent rally, mutual fund industry witnessed a rise in inflows because of the soaring stock markets and India had a good growth story ahead but suddenly, all changed.

The Problem

At the end of January, news came out that a virus named Coronavirus has spread in China, the place that exports to most of the countries, and most manufacturing activities had come to a halt. And when factories in China shut shop, it’s not a good look for anyone anywhere in the world that deals directly or indirectly with it.

Mid -February and we started seeing that cases have started emerging all across the globe — Italy, Iran, Japan, South Korea, and India and we are talking about mass infections in multiple areas. And as of today, it has spread over 212 Countries and Territories across the world with over 1,42,26,136 cases and counting, so this event has termed as Global Pandemic by the World Health Organization (WHO).

The Impact

On Economy

The First Quarter of FY20 has ended and the effect of the pandemic has not just reversed the trend of India but also questioned many about the effect of this. Before the pandemic, the chances of the USA, the top country in the number of cases, entering into recession were 50%, but now the chances are quite high because many states have still not faced the lockdown and cases are far from reducing and about 47 mn people have filed for unemployment claims. Singapore had a contraction of 41% in the economy from Apr-Jun.

So where does India stand? India is in a very conscious stage. The RBI governor himself quoted that the Indian economy is not immune to the coronavirus pandemic, and RBI has taken several measures to safeguard it. The various stimulus package has announced to support the distressed sectors but slow growth will affect the country for a long time.

Most of the states are witnessing the second phase of lockdown with a sudden increase in cases, with Maharashtra, the financial capital of the country the worst affected. There is only the essential buying and selling of goods and services taking place.

Production of various economy-related services has stopped, layoffs of employees are taking place, payment of salaries is being delayed, temporary workers have migrated to their respective villages all because there is hardly any demand and supply in the market.

Lending has shrunk because the major chunk of MSMEs is shutting down and many are struggling to stay afloat. Savings have increased and the reason for that is fear. Fear of losing jobs, fear of shutting down of the business, and because of that demand has gone down considerably. Everyone is affected.

Compared to 6 months back, most people are now saving a lot more every month because everyone stays at home. People are seen liquidating their savings to be able to afford their daily expenses. Everything is in a mess and the curve is far from flattening.

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The next 6-8 months are going to be quite crucial and painful on the economy front.

 On Stock Markets

The effect of the pandemic has factored into various sectors and companies with weak financials are seeing their profits take a hit. Many companies have opted for a moratorium on their loans and are seeing a slowdown in their business activity.

On Indices front, the impact was not much visible on the markets as of 1st Feb and the highest Nifty level in this period was 12,201 on 12th Feb. But once the Coronavirus fever spread to the markets, panic spread very fast and the market made a bottom on 23rd of Mar and after making the low of 7500 on the Nifty index on 23rd March, it is making way to move back to its original levels on hopes of vaccine development, and with the help of strong, leading companies that are showing decent growth in their Q1 numbers.

Let’s compare 2008 and 2020 economic crisis :

In 2008, Indian companies were doing good business, the economic activity was working smoothly, every company had their production going inline, people were consuming, there was buying and selling of goods, why? because that was a country-specific financial crisis.

Yes, there was an economic slowdown for a few months but that didn’t have a great impact on Indian companies because the economic fundamentals were strong, companies were strong financially, they had good profits and most importantly they had good reserves with them to handle this crisis and that’s the reason India came back stronger in few months.

But 2020 is not the same, at all. As mentioned earlier due to the lockdown most of the companies have stopped their production, workers have migrated back to their villages, layoffs of employees are taking place, you see where this is going? This time the companies are financially weak.

If you talk about the income statement and the balance sheet of a company everywhere you will see zero to some sales why because the business activity has mildly started and everyone is sitting at home waiting for this pandemic to get over.

I was wondering why Warren Buffet sold his stake in airline stocks and what happened to his theory of “Buy and Hold” but now we are hearing from many airline companies like AirAsia, Emirates, and even AirIndia are laying off employees because of the travel ban throughout the globe. So you see 2020 is not comparable to 2008, probably a little worse and the effect of this pandemic has just started and the worst is not over but the worst is yet to come.

On Sectors

Most Affected

  1. Aviation – The pandemic and the resultant lockdown has severely affected the aviation industry and the financial crisis is expected to have a prolonged effect in this sector in comparison to other sectors. There are no signs of recovery. Safety concerns will make consumers think twice before booking flight tickets although quite a few measures are being made by the aviation minister and the airline companies itself, there is no hope of recovery before any vaccine comes out and quite a few safety measures are taken.
  2. Hotels/Tourism – Travel ban has directly impacted the hotel and tourism industry. Many events, weddings, and corporate travel have cancelled with many hotels being used as quarantine centers. The luxury segment is seeing the highest delay in the improvement of occupancies and just like the aviation industry, no recovery is expected unless the virus has vanished.
  3. Multiplexes/Malls – Since the main motto of the pandemic is keeping social distancing, and multiplexes and malls play in the total opposite way, this indeed can be the place where you can see new rules and regulations to attract crowds to get back on track. Plus OTT platforms like Netflix, Amazon Prime & now Disney+Hotstar as competitors to the entertainment industry, we might also see some interesting moves by the entertainment industry to attract crowds.
  4. NBFC/Small Finance Banks – NBFCs and Banks are the backbones of the economy. Because of the pandemic, RBI has announced that all Banks and NBFCs are allowed to give a moratorium of 3 months on repayment of term loans and now talks are going on that it may extend it till November. In the longer run, the impact of the lockdown will be huge on the banking sector with the rise in Non-Performing Assets (NPAs), a decline in credit growth, and a rise in credit cost.
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Moderately Affected

  1. Information Technology (IT) – The depreciation of Indian rupee against the US dollar (1 US$ = 75.02 INR) has benefited the IT companies, where the major proportion of revenue is USD denominated and costs (employee expenses) are denominated in local currency. With good Q1 numbers from leading companies, the outlook mainly will be demand-driven and as growth revives, margins are expected to expand. However, it is implied that working capital cycles need to be keenly observed.
  2. Industrials – Growth likely to be negatively impacted due to delays in infrastructure capex and demand weakness in end-customer segments. To take into consideration, cement, real estate, and electrical industries will be to watch out for. Pricing has considerably decreased for the sale of the builder’s unsold units, a lot will depend on the demand of the consumers for these specific industries.
  3. Automobiles – Consumers are likely to defer new vehicle purchases due to low confidence levels and delay in unnecessary purchases so demand is likely to be muted for the coming months for mid and high range vehicles but due to the social distancing norms, affordable range 2 and 4 wheelers are expected to have pre-COVID sales soon. Note, May and June’s numbers show that rural growth is much better than the urban area and 2 wheelers have seen good growth over 4 wheelers.

Least Affected

  1. Pharma – Demand for pharma products remains largely stable in the light of domestic outbreaks due to patients requiring their regular medicines on time. And no sooner when the Government announced the export of key vaccines to the most affected countries, most of the companies got involved in making a vaccine for the pandemic so sales are less impacted. But the Healthcare industry could be a hit due to a drop in their regular business with a lack of walk-in patients, staff shortages, and the inability of availability of regular doctors.
  2. Telecom – Classified as an essential service, ever since the lockdown started there has seen a huge jump in the consumption of data, thanks to the penetration of the OTT platforms and major films deciding to release on these platforms. Home-traffic is up but enterprise traffic is down because of the closure of most of the companies. But as soon as the lockdown is lifted and the company starts operating we can see the consumption back to normal in one or two months.
  3. Fast Moving Consumer Goods (FMCG) – Demand is and will likely be stable throughout as consumers will continue to spend on essential goods, and continued demand for sanitizers, detergents, and soaps have made many companies shift their product portfolio to meet those demand, however, one can expect a downtrend in high-end products.
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The Way Ahead

So, Is the worst over? Well, you just can’t predict this but you can certainly understand the effects of this pandemic and take measures accordingly.

On the Economy front, Companies are delaying hiring, workers aren’t thinking to come back due to good monsoon and the ongoing harvest season, investments are being delayed, most of the salaried consumers and MSME businesses are opting for moratoriums, buying is been delayed and whatnot.

The behavior of the customers, the services companies will provide won’t be the same as before, and it certainly can change the outlook of the economy. We don’t know when the situation will get normal and companies will start operating but when it does, consumer movements, their buying patterns will be closely monitored.

Companies are not going to be aggressive, they will wait and watch what’s happening in the market, how their competitors are reacting and then act. It will take quite a few months to get things back to normal.

On the Stock Market front, the markets around the globe have taken a beating and Nifty 50 has been following the behavior of Dow and has dipped more than 20% from the January highs but has recovered up to 25% from the lows touched in March.

The Market runs on sentiments and assumptions. It means that in short term market numbers reflect the sentiments. The sentiments may be irrational sometimes and so is the behavior of the market in the short-run as everyone has their assumption based on a different level of analysis and future expectations.

However, in the long run maybe a few quarters down the line, it will always show you a more rational and concrete number of the underlying. The current move is on hopes but the actual move can happen when the 2nd & 3rd quarter sales numbers of the companies will come out and so the next few months will be challenging.

Final Say

  1. It is impossible to time the market so always stay in the game.
  2. Don’t always be fully invested, Don’t always be fully divested.
  3. In a bear market pick quality as they are the ones that rise first based on their strong management and financial strength.
  4. Focus on sectors that are least affected by such an economic crisis.

 



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Aakash Shah
A Finance Enthusiast | Passionate about Researching Stocks of Various Sectors | Karma Believer
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