If Covid disruptions last beyond June, FY21 GDP may see 0.2% de-growth: Gautam Chhaochharia

If the coronavirus pandemic tightens its grip on India, and if the disruption extends beyond June, the Indian economy may see 0.2% decline in fiscal year 2021 in the extreme scenario, warns Gautam Chhaochharia, Managing Director and Head of Research at UBS Securities, India.

In an interview to ETMarkets.com he said in case Indian managed to achieve quick normalisation, the economy may grow at 4 per cent for financial year 2021, which is UBS’ base case forecast. Assuming this is not a prolonged scare, and it does get resolved, his base case target for Nifty for March 2021 is 10,000. Edited excerpts:

Is the current crisis worse than what we saw in 2008 from market’s point of view? What lies ahead for us?
There are two elements: First is from a pure market’s perspective. If I look at current market valuations on a headline basis for Nifty, we are not yet at the GFC (global financial crisis) lows, despite the big correction we have seen.

The second point is, the current cycle is very unique and different. We cannot really compare it with GFC. We have not had any market cycle historically, where it has been impacted by a health or medical issue like Covid-19. So it is very unique cycle, because it is leading to prolonged shutdowns or what we call social mobility restrictions. So the damage to the economy and the market has not been directly from Covid-19 cases, so to say, but from prolonged social mobility restrictions, like we see in India’s 21-day lockdown. Now the question is how quickly will it come back to track? As we saw, more and more social mobility restrictions in more and more countries, our global macroeconomists have been cutting down their economic forecasts.

Talking in terms of markets, do you think government is doing enough for the economy and the markets? Do you think the government is going all out?
If you remember GFC, the fiscal expansion was much more material than what we have seen till now, even though the starting point of fiscal year was far-far better than it is today. So there was a lot more fiscal space back then, and the government and policymakers used that fiscal space that time and expanded by almost 4.5 per cent of GDP.

Now the question is, will policymakers respond to the requirements of society, humanitarian needs and even for economy? They have begun this time too. There are fiscal constraints. So yes what you do in terms of stimulus today, there will be costs of that to pay later on.

Market cycles works in a very different way. They work in every compressed timelines, like we have seen in the sharp market correction in last few days. But from a real economy and real world point of view, the shutdown in India has only started. All the challenges which the markets have been talking about in terms of job losses, payment mechanism, etc, are still not happening in a big way. The immediate challenge is actually for daily wage earners or the poorest of the poor, and not for the big corporate employees or for financial markets. So the first response was to look at the immediately impacted. The rest of the impact we will see in the next few weeks, then potentially the policymakers will respond to that also.

What is your assessment of the Indian economy as we stand right now, and how much impact is expected on the GDP growth?
So again it is a very fluid world and as I said the real metric is the social mobility restriction or the lockdown and if and for how long it continues beyond 21 days. So the base case forecast by our economists for fiscal year March 21 is 2.5% GDP growth rate and if this is a prolonged scenario, then India’s GDP could even decline by 0.2% for FY21.

The way we have been seeing volatile swings in the market, how much more pain do you see going forward?
Just like economic growth, there are many moving parts to this. If I look at the risk reward, if I look at past cycle, earnings scenario etc, our risk-reward framework is that the downside for market based on what we know and assuming this is not a prolonged scare, and it does get resolved, then our base case for Nifty for March 2021 is 10,000. If we look at a more downside scenario, where things really get prolonged, then the downside scenario for us is 6,000 on Nifty by March 2021.

It is a fluid scenario, markets have corrected very-very sharply. But the downside scenario could be even lower. On our base case, if things stabilise, the market should go up from here, Nifty at 10,000 level by March 2021 also would mean that you will have negative returns for 2020.

Shall we see a V-shaped recovery in the market once we recover from this virus? Do you think there is a likelihood of that kind of scenario?
The two moving parts are how prolonged the Covid lockdown is, in the sense if it is a 21-day lockdown and things become normal after that. We are in Phase 2 and does not reach Phase 3, and we have some policy support, then yes, we could.

If it is a more prolonged shutdown, which results in more job losses, then it will take time for the economy to come back. So, the more the disruption, the longer it would take us to come back.

FIIs have been selling relentlessly in the Indian market. India is one of the markets which has been hit really hard. Why is India beaten more than other markets, and when do you think will this take halt?
India has seen a lot of selloff in absolute terms. The rate of selling has been starker than the 2008 GFC. But if I look at the percentage of market-cap, this is not as stark yet as it was during GFC. It has not even reached the levels we saw during 2013, as a percentage of the market-cap. India still remains a crowded market.

The other interesting part is we are still seeing a lot of local buying, mutual fund buying, unlike in 2008 where that buying was relatively less and was more sporadic.

Of late we have been seeing wild swings in banking stocks, particularly in names like IndusInd and Bandhan. There are a lot concerns over liquidity. Given the current scenario, which very fluid right now, we do not know which way things will go. But what is triggering these wild moves in banking stocks and what lies ahead?
To begin with, the banking system was grappling with confidence issues from the NBFC crisis and then we had private banks being re-capitalised. So there were worries around the tail of the financial sector. Then you had this Covid-19 and the lockdown, and this means your last-mile collections where you need physical interface is not happening. Some NBFCs / MFIs have become vulnerable, and it is not because they are unviable or anything, but they just cannot collect and, therefore, the system is stressed. Remember, there are a lot of interlinkages between NBFCs and banks. That is the reason we saw the sharp reaction.

Many of these financials, which were trading at rich multiples to begin with because they were priced for super-normal growth for a long period of time. What we are seeing now is the real worry about growth, and even collections. So, it is not a surprise that we saw this kind of a sharp correction there.

What is your take on RBI action? Do you think it has done enough or could it have done more?
They have done a lot. Of course, if we compare with developed markets’ central banks, they could arguably do more, if and when needed, something the RBI governor has also alluded to.

The other obvious sectors are airlines and hospitality, which will be worst hit from the Covid-19 impact.
So the obvious ones are travel, airlines, entertainment. We have seen stocks from these sectors coming under pressure. Financials are the other one, where again we have felt the heat. Then there will be even construction and property. In autos we have seen plant shutdowns.

Is it the time to buy, and if so, which sectors can be bought into at this point of time?
I would not say specifically time to buy, because concerns around Covid makes the outlook uncertain. We have to make big assumptions about how Covid plays out, and that is tough for any of us. But yes the risk-reward appears to be attractive, if one assumes normalcy will return in next 1-3 months.

Besides Covid control, where else would you be looking at for signs of stability?
From a global markets perspective, beyond tracking how Covid cases evolve, and beyond tracking development of treatment, medicines or vaccines from a pure market perspectives, we have to look for cues for stability of credit markets, before we get more comfortable around equity markets.