While initially the discussions centred on pre corona and post corona worlds, now it is becoming apparent that there will be a significant period of Corona world. Effective vaccine and therapeutics are likely to take time and the virus is not going to be eliminated in a hurry. At the same time, the costs of lockdown are enormous and therefore balancing lives and livelihoods seems to be the way forward. Coexisting with the virus is necessitated and therefore individuals have to be very vigilant themselves from both health and financial aspects.
Indian lockdown started on March 24 for 3 weeks and was extended till May 3. Now the government faces a difficult decision on whether and how to exit from the lockdown. It has enormous costs and sustaining it for a long period of time can cause severe economic damage. Additionally, there is a large young population who might not get any or only mild symptoms. Moreover, there are many cities and districts which are affected very little. Even a big city like Bangalore has only 120 cases. A 1000 bed Victoria Hospital designated as Covid hospital has 6 patients with nobody on ventilator. On the other hand, there are reports that active cases in India would have been 9 times more without the lockdown. Arvind Kejriwal, Chief Minister of Delhi, in a recent press conference said that lots of positive cases are totally asymptomatic. Opening up poses the risk of the silent carriers infecting others with this highly contagious virus and there will be a serious threat to more vulnerable segments of the population.
Government is moving towards what Mckinsey in a recent report stated as ‘moving back to work in save lives and livelihoods mode with strong protection protocols’. Most probably it will be an attempt to return to normalcy in a graded and staggered manner. Efforts are being made to resume at least some activity in construction, manufacturing and agriculture. Government offices started working again with senior officials attending office from April 20 onwards. Shops even for non essential goods in local markets are being given permission to open. This is balanced by not allowing any large congregations, keeping malls, restaurants, cinema halls closed. Schools and colleges will of course not open in a hurry. All areas are being divided into various zones with red ones following total containment policies.
A good example of protection protocol is Delhi airport which is preparing to resume flights in a very guarded manner and with strict restrictions. There will be mandatory face masks for travellers and crew, no queues for security clearance, restricted use of in flight lavatories and a stop on all in flight meals. Delhi Metro is also in a similar mode.
Additionally the government has to come up with a very well designed and targeted stimulus to at least partially repair the damage caused by this unprecedented crisis and the ensuing lockdown. There is destruction of both supply and demand therefore fiscal and monetary stimuli have to support the whole ecosystem including households, health industry, corporations, SMEs, banking system and NBFCs.
The economic damage even with this partial return could be about 15 % contraction in output in Apr- June 2020 quarter and close to zero, if not negative growth for the fiscal year 2021.This can put about 2 crore livelihoods at risk and increase NPAs by 5%. The cost of stabilizing households and companies and lenders could exceed 6 lakh crores ( about 3% of GDP).
A major risk of opening up will be of a spurt in new active cases. That might result in another lockdown. Economists are calling it a risk of go stop go stop economy. In such a scenario, the economic damage will be enhanced significantly.
Another risk is if the stimulus is perceived to be inadequate or not well designed to solve this unique problem where both demand and supply are compromised. For example, a major mutual fund company Franklin Templeton had to wind down six debt schemes because of low liquidity in Indian credit markets.
Consequently, coexisting with the enemy poses some fresh challenges and the responsibility will increasingly be more on individuals. In the lockdown everybody was at home, so in a way practising social distancing was state enforced. Now individuals and families will have to be even more vigilant themselves. It will be essential to continue social distancing norms, washing hands frequently, sipping warm water, wearing masks, working from home if possible and meeting people only when absolutely necessary.
From a financial perspective, since uncertainty might persist for a longer time, it will be important to ensure good liquidity for the next 12 months. Quality is vital as is evident from Franklin Templeton example. Within debt schemes one should be in highly rated overnight or liquid schemes.
For excess liquidity with a 4-5 years time horizon, as I had written in my previous articles, equity can be considered but it is sensible to invest gradually and incrementally in tranches. Since risks are there and uncertainty looms, investing in quality stocks and well regarded schemes is crucial. There is an understandable leadership shift – pharmaceuticals, consumer staples, technology, chemicals and fertilizers performed well in the current equity up move while financials ceded their position. Reasons include expectation of retail loan demand taking time to pick up and possibility of defaults.
Lots of people have been asking that given this big crisis, why is stock market going up? I have tried to utilize example of a very important Indian stock HDFC Bank. It was trading at around Rs.1300 and fell 40% to 780 in less than a month. Expectation at least today is that this fall will not be matched by similar erosion of its earnings, especially long term earnings on which hinges the price of a stock. Consequently, it offered a great value at the price of Rs 780 and staged a reasonable recovery, closing above Rs 1000 today though still 23% below its pre Covid value. However, at this or slightly higher levels, market will again be vulnerable to a risk of contraction of price earning multiple if active cases increase or the stimulus falls short. So a second wave of selling cannot be ruled out. On the other hand, if news emerges of a successful vaccine or treatment (Gilead reported yesterday success in its preliminary trials), markets can go up higher too. Therefore slow accumulation and rupee cost averaging are imperative.
Investing hierarchy of first liquidity, then safety and finally yield enhancing volatile instruments has never been more important. Additionally, rules of diversification, time horizon and valuation remain vital when investing in volatile assets like equity markets.