Capital markets have had a rough ride this year and the COVID-19 outbreak has knocked off investor wealth globally. The coronavirus pandemic and the nationwide lockdown, imposed to curb the spread, will have a huge impact on the economy and various sectors will be badly affected. In a video conference organised by the PHD Chamber of Commerce, two market veterans–Nilesh Shah, MD of Kotak Mahindra Asset Management Company and Prashant Jain, executive director and chief investment officer at HDFC Asset Management Company, shared their thoughts on equity markets, economy and sectors that will benefit and those that investors should avoid.
Is this a good time to invest in equity markets?
Nilesh Shah: Undoubtedly, this is an opportunity to buy equity, but please remember to pick up right stocks because there is extreme volatility ahead. Don’t assume the market has bottomed out. This is undoubtedly the time to be overweight equity, but on a calibrated, gradual basis. Divide your incremental equity investments in two parts–one part is to be invested when the market is in uncertain mode; that way you will be investing at every level when the market is falling. You try to invest the second part when you believe there is hope that a solution to the pandemic has emerged and economic activity will resume with full force.
Prashant Jain: It is only thrice in the past 30 years that India’s market capitalisation to GDP has fallen to 50 per cent or below levels, which is a great value in these markets. It is extremely hard to forecast if the markets have bottomed out or not. In this kind of an environment, the best strategy would be to assess whatever is your long-term surplus, where you can tolerate volatility and you should invest that in two-three rounds. One round could be invested now, another round could be invested after a few weeks and yet, one more round could be invested after a few months.
What is the impact of the pandemic on the economy?
Nilesh Shah: Somewhere, between the time taken to find a medical solution for coronavirus and (the announcement of) fiscal stimulus will determine what will be the shape of our recovery. In the most unfortunate scenario where a medical solution emerges very late and our fiscal and monetary stimulus is low, recovery will be L-shaped, crashing speedily in a vertical fall and not moving up at all. In the most fortunate scenario, if our monetary and fiscal stimulus is high and discovery of medical solutions happens faster, our recovery will be V-shaped; April-May coming down sharply, but post that--in June, July and August--recovering very sharply.
Prashant Jain: The economic impact of COVID-19 will be far more than what we experienced after Lehman (2008 global financial crisis). It will impact consumption significantly because it will impact wages, especially at the low-to-mid income levels. India is a two-thirds service economy and because of COVID-19, people will travel less, eat out less, shop less and almost 40 per cent of the employment is provided by the services sector. The cycle of the economy that has been broken, will take quite a while to get fixed and this slower economic growth will persist for some time and we won’t be going back to high growth rates in a hurry.
For India, there are several positives. India will benefit significantly from low oil prices. Large electronic imports and gold imports will also moderate. India’s dependence on exports is relatively small compared to most other countries. Our current account deficit will fall sharply. But, the fiscal deficit will go up sharply in the current year; higher taxes on oil products cannot offset the loss of revenue with the current economic situation.
Which are the sectors that will be impacted the most?
Nilesh Shah: Aviation, travel, hotel, multiplexes, retail, small and medium enterprises are worst affected and if there is leverage in these companies, there will be double whammy for them. High-ticket consumer durables are likely to see deferred demand, too.
Banks, which have large concentrated exposure to a single sector will see their problems rise. For instance, micro-financing companies have been hit hard as they have not been able to collect payments. Companies into commercial vehicle finance will be impacted, too, with 90 per cent of the trucks currently parked due to the lockdown.
Prashant Jain: Profitability of several sectors, especially ones that have discretionary products and where the cost structures are fixed, will see significant erosion. When businesses suffer in profitability, they have to cut costs and this will once again prolong the slowdown in consumer discretionary spending. If a retail store or an airline or a hotel company doesn’t do business for a few months, it can impact profits for six months to one year.
Banks or non-banking finance companies, with higher exposure to small retail loans or excessive exposure to SMEs, could see challenges of both growth and non-performing assets.
What are the emerging opportunities?
Nilesh Shah: The Indian chemical industry today is at the same inflection stage, where the IT industry was in 2000. Indian chemical companies are getting into the global chemical market with smaller doses, niche chemicals, but are also getting larger orders over a period of time.
Most people have now appreciated that they need to save for the rainy season. The savings pool will increase in India in the days to come. Businesses that can participate in this, like banks, insurance companies and mutual fund houses will benefit.
In automobiles, it is possible that we may shift away from Ola and Uber to personal vehicles, maybe two-wheelers or low-entry level cars. But, people will prefer personal vehicles over public transport.
Our spending in healthcare will increase as a percentage of our expenditure and the same will be the case with the government as they divert the money and spend on healthcare infrastructure. Companies engaged in wellness, pharmaceuticals, medical equipment, healthcare infrastructure and medical insurance should benefit.
Banks with a diversified portfolio will also face lesser problems
Prashant Jain: Sectors like oil and gas, oil refining, marketing, large EPC (engineering, procurement and construction) companies, utility companies, pharma and software companies, will see modest impact.
Pharma, IT companies and retail-focused banks are trading at fair valuations, while some large corporate banks, EPC companies, oil marketing companies are currently undervalued.