‘Getting virus spread under control, a key to market revival’

The major risk factors would be irregularity in production and demand slump from a weakening job market. For example, many auto companies such as Hero, Mahindra, etc, have suspended production. Consumer demand was already weak and the virus will exacerbate this weakness. In such times, generally consumers curtail all discretionary spending.

Poorer sections of the population will be hurt more by the virus. Typically, their consumption expenditure is higher as a proportion of their income than for higher income groups. Hence, consumption demand will suffer. These factors will result in loss of sales for companies, and the inability to overcome fixed costs, and hit to cash flows.

The government must restore confidence in the economy by putting out credible measures to fight off the virus. The government must judiciously spend financial resources it has in intervening in those parts of the economy that need funds the most — as opposed to insisting on policy rate cuts by the RBI which don’t really target any sector. Note that some sectors such as real estate, airlines, etc, are more seriously affected than others.

Next, the financial support from the government must be directed towards corporates as well as consumers, instead of only one of the constituencies. That will keep the demand-supply balance from getting lopsided.

FIIs are selling due to a variety of factors including redemptions, equities being in a downward spiral due to several technical factors such as leverage unwinding, margin calls, etc. The market is in a deep oversold territory due to forced selling going on around the world. This is likely to abate in sometime, but the precise price levels at which it will happen is a bit tough to predict. One can say that when the US gets the virus spread under control, we have a good chance to see the panic selling come to an end globally. Then FIIs will not look to rush out of India so desperately.

Generally, though the perception is that low crude oil prices help the Indian economy, there are other factors. Just to describe two: 1) very low crude prices create potential for large-scale defaults by shale (companies) on borrowings, as feared currently in the US which then can create credit market dislocations; 2) generally higher crude prices are associated with stronger demand conditions globally at which times there is more capex, which in turn creates more demand. On the other hand, very low crude prices eventuate usually in depressed conditions, where investors look to shy away from equities, especially emerging markets, into safer asset classes. Indian equities tend to underperform in such conditions.

While stocks are getting cheap, investors must always be prepared for sudden dips in times like now, where there is volatility. That said, value is emerging in pockets. For instance, several private banks are available at low multiples owing to the fear of large defaults (which will cripple their capital structure) from many borrowers all at once. But it is quite likely that the RBI relaxes NPA recognition norms and avoids large-scale capital erosion for banks.

Over time, as the virus infections come under control and companies resume production at full capacity, this relaxation may be reversed. But such ways of managing stress mean that select private banks are good value. There are also examples of utilities like Power Grid which are trading at sub 6x PER and 7 per cent dividend yield. Such opportunities are rare. Hence, while it is difficult to call a market bottom right now, there are some good investment opportunities now.

COMMENT NOW