Indian Lockdown – Major Impact on Global Pandemic Trajectory?

Sanjiv Mehta  |  2020-03-26

Financial markets as expected are nowadays inextricably linked to a single factor and there are no prizes for guessing which one. A few weeks back in India, everyone involved with portfolio management was focussing on GDP growth factor and now totally unexpectedly, one is looking at the daily growth rate of fresh corona cases. Suddenly, medical doctors with MBA Finance are very much in demand.

In various countries, its growth continues unabated. Now there is news of Prince Charles contracting it. His natural desire like that of any child running a fever is to be very close to his mother but as usual conspiracy theorists are having a field day.

The big news on 24th March was PM Mr. Modi announcing total lockdown of India –one commentator described it as an unprecedented social experiment of huge magnitude. I see it as something where there was no other alternative. WHO believes that Indian response is very important and trajectory of this global pandemic is now dependent on how India handles it. Indian health experts too showed unanimity in asking for it since India with its dense, large population and limited healthcare resources will find it very difficult to cope with escalation of this pandemic into community transmission known as stage 3.

I had written in my previous article that there were some countries which had shown flattening of the growth curve of fresh cases and therefore eventually various countries will try to emulate it. The most important step they had taken was that of enforced social distancing and PM Modi talked about those examples while detailing the necessity of such a big step.

For every major crisis similar to that of a relationship gone sour, there are stages, first one is of denial, then of anger, then trying to regain what has been lost, then of acceptance and finally starting a new chapter in your life. India lockdown is a major extraordinary measure, an acknowledgement that this is an extraordinary global crisis. Compliance is also possible because people are scared. We are reaching a stage where there is full acceptance of the gravity of the situation, leading to integrated global response. Previous similar crises, notably SARS got resolved after they had reached this stage.

Economic costs are of course high with a total standstill and even at this stage, it is very difficult to predict how long this slowdown will last, how deep it will be and what scars it will leave. If the disease remains for a longer time period, it will impair certain businesses to an extent where the recovery will be on the slower side. An economic stimulus package is being prepared and should be announced soon. Depending on the details, if it is targeted well at sectors which need the most help, it will facilitate faster recovery. It is also likely to include direct benefit transfers to more than 10 crore poor people. This crisis has sparked a debate on Universal Basic Income. While at this point, India cannot afford it but temporary targeted transfers will be beneficial.

The consequent impact on the financial markets has been expectedly severe. Sensex was close to 42000 on Feb 17, 2020 and had fallen to 26500 on the lockdown day, a 35 % decline from its highs. It seems that the markets have already discounted a major slowdown in economic growth for at least next 2 quarters . The next move will be dependent on how disease progresses and whether lockdown is successful in breaking the transmission cycle. Focussing on daily fresh cases and growth percentage is going to be useful. There were 102 new cases on March 23, 66 on 24th and 86 on 25th, the first day of the lockdown. This is very little data but following it will be instructive in gauging the future market direction.

Given the uncertainty where various outcomes are possible, the market can rebound smartly if stimulus is good and transmission slows down but it can also go down if growth of fresh cases continues at the current rate. Therefore it will be important to keep good liquidity in the portfolio as I have emphasized in my previous articles and simultaneously not to disturb the long term equity part of the portfolio. If liquidity is less than that of 6 months, then generating some will be useful while keeping the long term portfolio intact as much as possible.

Stay healthy, safe & financially secure