Looking back, Moving forward by Navneet Munot, CFA

First and foremost, I hope that you and your loved ones are safe during these challenging times.

At the beginning of fiscal year in April, I am sure all of us felt a sense of déjà vu – the second wave of covid brought back the unpleasant memories of last year. The mutant this time was a lot more viral and didn’t spare even youngsters. The strain on healthcare system was beyond imagination.

Last year, vaccine availability was a distant, wishful dream. However, thanks to collaborative efforts globally, multiple vaccines have been made available in record time. Challenges around vaccine procurement / administration are being addressed across the board and thankfully, the second wave of covid is beating a hasty retreat even before the first quarter of this fiscal year draws to a close.

While the psychological scars from the second wave are deeper and will take longer to heal, lessons on the economy were well learnt from the last time. Monetary policy has been extraordinarily accommodative and the fiscal pedal remained in acceleration mode. Along with policy support, a strong vaccine stimulus can help India to get back on a steady path to recovery, something which markets are factoring in. Markets are forward looking and are surely running faster than the economic recovery. This strong momentum is aided by easy liquidity and heightened participation of retail investors. It is very difficult (almost impossible) to predict near-term course of markets, hence, investors should remain focused on the long term picture.

“Something good comes from every crisis” – Dave Pelzer

While the above quote may seem like mere platitude, it is indeed a fact that every crisis throws interesting opportunities. The second wave of Covid turned out to be lot more painful but the public discourse this time was not only on ‘survival’ but also on the big R of “Revival”. Let’s have a look at some other ‘R’s that have come under the spotlight with important implications for all of us.

– Recession to Reflation : While Central banks around the world have been trying to shake off deflation over the past decade, the loose money had limited impact beyond fuelling the asset prices. As Covid triggered one of the worst recessions in history, it is worth noting that the magnitude and cohesion of policy response has been equally unprecedented. Combination of pro-growth fiscal measures, monetary stimulus and technological innovations can finally trigger a reflation in the global economy. Increased infra spending, fiscal support for distressed sectors and growth enhancing policies with focus on capex, job creation and income growth are triggers for onset of structural growth globally. This should augur well for Emerging Markets, including India. High public debt in the aftermath of the pandemic along with rising inequality would compel policy makers around the world to have an unwavering focus on economic growth.  Excessive money chasing few growth opportunities along with momentum created by flows in ETFs, narrowly defined ESG, higher proportion of machine trading and Robinhood effect, together led to excesses in certain pockets. Expectations of a global reflation and broad-based growth have started correcting some of these excesses and one can expect the trend of reversal in market polarization witnessed in last decade to continue viz. Value vs Growth, cyclicals vs defensives, Emerging Markets (EMs) vs Developed Markets(DMs), Large Cap vs Small Cap, so on and so forth.

A potential implication of global reflation would be higher commodity prices. However, if one goes by history, rising commodity prices (except in times of violent moves on either side) have acted as tailwinds for our markets, as they reflect strong global growth while leading to higher credit growth, tax revenues, remittances and foreign flows and new capex.

– RBI’s Resolute approach : Five pronged approach of RBI viz. Steep rate cuts, massive liquidity injection, moratorium, one-time restructuring in a calibrated way and relaxation of prudential norms provided financial and macro stability in such a challenging time. While inflation may rear its head and policy makers would have to be highly vigilant, RBI remains resolutely focused on supporting the growth momentum.

– Long-ranging Reforms : The government’s primary focus has rightly been on providing necessary support to those at the bottom of the pyramid and ensuring credit lifeline to Covid-stressed segments through innovative credit guarantee schemes. The heartening feature of the “package” was the continued focus on reforms like Agriculture and labour reforms, strong push for domestic manufacturing and bold intent on privatization. Coming on the back of series of structural reforms over the last several years, these moves will unshackle the growth potential of India.

– Digitally Re-designed World : Digitization has been the buzz word that has kept the world afloat during the pandemic and the trend is set to continue even in the post-covid world. Someone rightly said, Data is not the new Oil, it is like renewable energy and in abundance as it increases with use! India, with one of the highest smart phone users and internet consumption in the world, will be at the forefront of this digital revolution with positive implications on governance, transparency, economic productivity and quality of life. Digitization is transforming every business with unforeseen potential. 

– Geo-political Re-alignment : Covid has accelerated the geo-political re-alignment which was already underway with US-China conflict. There is a growing inclination to diversify supply chains. With a conducive environment for business, large labour pool supply across talent spectrum, huge domestic market and competitive tax regime, India is well-positioned to take advantage of opportunities in the post-covid Re-aligned world.

– Revenge consumption along with Renewed focus on financial planning : While psychological scars post second wave are deep, social interactions and consumption will also be part of the healing process. We should witness pent-up demand across categories. At the same time, Covid has also ignited a deeper realization on managing financial affairs and should have positive implications on long-term savings.

– Recovery in Real-estate sector : Residential Real estate should continue to witness a revival in demand, especially against the backdrop of relatively stagnant real estate prices, low interest rates and reducing differentials between mortgage rates and rental yields. Supportive policies like cut in stamp duty was well-received.  The Covid situation has led to an increased desire of home ownership. Global cycle may also help with potential demand from Non-residents like the last time. Recovery in sectors like Real estate has a multiplier effect on the economy.

– Return of the investment cycle : Over the past few years, India’s growth has largely been aided by leveraged consumption and government expenditure. Other pillars of growth like export and investment cycle were largely muted. However, global tailwinds, Government’s focus on capex and improved economic outlook may kick start the investment cycle, which in turn, could trigger the virtuous cycle of job creation, income growth, consumption, savings and investments. Corporate and banking sector balance sheets are in better shape while newer instruments of long term financing and development models are coming of age.

– Resurgence of Corporate India : The Resilience and Resolve of corporate India came to the fore during the crisis. Stories abound of Innovation in processes and product offerings, distribution strategies and customer connect, rejigging of supply chain and cost rationalization. Contrary to common perception, in the post covid world, it’s not necessarily the big entities that will get bigger but the more nimble and agile ones that are emerging stronger. The corporate earnings growth has witnessed a long period of drought in India. The trough may already be behind us with a new cycle of profit growth just starting. Earnings growth will be driven by a strong tail wind from global reflation and a steady, broad-based growth cycle along with gains from Innovation and cost rationalization, lower real rates and low corporate tax rate. Signs of green shoots are already visible.

While all the above factors should be Re-assuring for investors, its important to keep an eye on the potential Risks. A third wave of COVID with implications on growth and delinquencies, sharp spike in crude oil or other commodity prices due to any supply disruptions and most importantly, any complacency among individuals, corporate sector or policy-makers could impact the growth momentum as well as investor sentiments. This crisis has also re-inforced that there are risks that can never be fully visualized but manifest in least expected manner. These unknown-unknowns can’t be hedged using sophisticated models. The way to deal with is by building resilience and responding rightly rather than reacting in haste.

Disclaimer: “Any views or opinions represented in this blog are personal and belong solely to the author and do not represent views of CFA Society India or those of people, institutions or organizations that the owner may or may not be associated with in professional or personal capacity, unless explicitly stated.”