July 4, 2020
“We cannot truly plan, because we do not understand the future- but this is not necessarily a bad news. We could plan while bearing in mind such limitations. It just take guts.”- Taleb: Propounder of The Black Swan theory.
Pessimism that set in March, still persists in our minds. In fact it has deepened with growing number of Covid cases being reported. The largest question ruling our minds today is – Shall we ever be able to overcome it………….. and if yes by when and how?
Have we ever wondered how have the Indian culture survived for so many thousands of years, how come so many Indians who were transported as labourers to many African and European countries centuries ago are now ruling the roost or how come most of the top 20 firms in the world have Indian heading them and so on………..
The only reason to above and many such questions is our “Ability to Adapt”. We are fast learner and very quickly adapt to new situation. Indians enjoys six different weather in a year and we are very quick to adapt to the changing weather conditions. In ancient India there was no Purdah System for our women but they adapted to the changing social-political environment and started using Purdah to protect themselves from evil’s eyes. And you will find so many examples of the traditions or customs or transitions that we adopted with the changing environment. We adapt very fast to the changing lifestyle.
What it has to do with our investments or how does this impact our economy and investments?? To analyse the current situation and future probabilities and how does our ability to adapt matters, first lets see:
What lies ahead
Let’s discuss negative issues first that will adversely impact our economy and in turn stock markets. Broadly there are four key issues that have potential to further disrupt our already limping economy and may aggravate the agony of the markets:
Corona: World over this disease seems to be peaking up. In fact some smaller countries like New Zealand have declared themselves to be corona free. But for India story is different. India was able to control its spread to a good extent unless mass migration started happening. And more after when people started moving freely after unlock v.1. It has opened gates for community transmission. Though thus far community spread hasn’t happened yet but with opening up of more channels of movement which will bring more people on the road, we are probably nearing that stage. That is the negative side of it.
Do we see any positive out of the progression of corona so far? We understand that India is largely under-tested. Number of cases that have been reported so far by government probably do not reflect the true count of infected people. And that actual number is many times higher than this. This is for the infected people but the number of corona deaths being reported cannot have that large anomaly. Our social media warriors are very powerful and corona deaths not reported by the government will not go unnoticed.
India has reported around 18,650 corona deaths of the 648,000 confirmed cases. This is less than 3% of the total cases. This ratio is much similar or even lower to other seasonal diseases that come with changing weather every year. And this number is despite the mass migration in large groups and corona entering densely populated slums and colonies like Dharavi and even villages. We are probably developing herd immunity.
We think that soon government will open all public transport over next two months. And with opening up of public commutation system, we may march towards community spread. Thus corona will peak out in India over next two months. And soon we will learn and adapt to live with corona. Remember our trait of adaptability.
China’s aggression on India’s border: China understandably have following grudges or fears from India:
1. India’s repeated resolve to take back POK. China is heavily invested in ‘China Pakistan Economic corridor (CPEC)’, major part of which pass through POK. It is very crucial part of its one belt one road (OBOR) initiative. Pakistan had tactfully brought China into POK thinking India will never dare harm China’s interest in POK. Thus they would be able to retain POK. Probably China too had similar thoughts and invested heavily in this region. But recent stance and actions of Indian Government have shocked the two. And China too is feeling the heat on this front.
2. Leave aside POK, India’s home minister has declared in parliament that Akshai Chin which is illegally occupied by China since 1962 is part of India and India will make every type of effort to regain this area. Government recently enabled regulatory provision to prohibit neighboring country’s companies’ efforts to takeover Indian companies. Widespread calls for boycotting Chinese goods, cancelling many orders and tenders and revision in import duties, have added fuel to fire.
3. Over last few years India has fast paced infrastructure development along China border and have developed many strategic, airports, air strips, all weather roads etc. India’s acquisition of latest warfare from across the world and its continued quest in this direction is transiting India to becoming a formidable force. World knows that Indian troops are the best in the world and now being equipped with the best warfare they have strengthened their position of being formidable force.
4. India is the fifth largest economy in the world. And over last few years India either was the first or second fastest growing country in the world. Post Corona, India is set to catch up fast with Chinese economy much earlier than thought off as other countries will be reducing dependence on China for their requirement which will impact its GDP growth.
5. China is facing growing unrest among its own citizens against its internal policies and the way it had handled corona situation even within its own country. They are concerned about its policies on Tibet, Hong Kong, Uighur Muslims etc.
6. Diplomatically also India has fastened its position and now many countries have voiced for India’s claim of a permanent seat in UN Security Council and Nuclear Suppliers Group which China has been vehemently opposing for long time on one or other pretexts.
USA’s Elections & International Order: US will have its new president in November. Whether Mr. Trump comes back or USA will have a new President, we don’t know. The way present US government has handled corona has not been appreciated by many. And protests against death of a black by white police official which at many places turned into riots and arson has also put a question mark on administrative capabilities of the government.
USA is already engaged in trade war with China. Though there was good progress on clinching a trade deal between US & China. But onset of corona has spoilt the equation. And Mr Trump has squarely blamed China for sufferings of US citizens. It’s not only USA but almost all countries who have suffered heavily for corona, had squarely blamed China for spreading it or not informing the world of its dangers in time.
Veiled intentions of China with its “Baato Karja, Karo Kabza” policy in the name of developing infrastructure for the countries joining its OBOR initiative had already raised concerns among many nations. Many developed nations had already become cautious of its imperialistic designs and growing ambition of becoming a super power. Budding cold war between these two powers with US supporting China’s adversaries and China threatening US allies need to be closely watched for over next few months.
Mass Labour Migration and Shortage of Labour: Diminishing hope of revival of economic activity in short period and unsympathetic treatment by local government forced over two crores of people to go back their homes from the place of their work which were thousands of miles apart. It was not just local politician’s apathy but also the modes of travel they had to take and their plight was very painful even for the people who saw it on television. Will they go back to their work places when full economic activities start taking place and industries are functional – there is big question at the moment??
Most of these workers work in SME units or were daily wagers. If they don’t return, then locally available labour will have to be hired at a higher cost. This will adversely affect the profitability of already stressed small enterprises.
Every Cloud Has A Silver lining
And so will have this difficult period that we are going through. The only sight our eyes are constantly searching for or the question in our mind is – do we see any silver lining. I guess there are many already. For example:
- Corona’s death rate is below 3% which is the case of other diseases also. Many people have got accustomed to the fact that this is also a kind of flu, to avoid which one need to work on his/her immunity and take precautions. We will see corona cases peaking up in India over next two months and if there is no abnormal increase in death toll during this period, will be great plus for the country and its economy.
- China’s aggression is nothing new except the fact this time it was fatal causing deaths of many soldiers on both sides with China suffering more than India. And then preparedness of Indian forces, their strategic advantageous position and good strategic alliance with other countries and the kind of economic loss it will suffer, will deter China for escalating it to a war. But yes this impasse will continue for some time as both countries will try to negotiate harder to benefit from this situation.
- Once US elections happen and there will be visible shift in US policies. Just see that H-1B visas are suspended only for six months and not indefinitely. By this time corona will also be lot under control and very hopefully the world economy will be fully functional.
- Many workers who migrated to their natives have started picking up small entrepreneurial work to meet local requirements of their places indicating a shift in work preference.
- SME owners are asking their workers to come back and are making arrangements for those who are willing. A good number of workers now have started travelling back to their work places.
- Recent data showed that ecommerce companies are doing same or higher business than pre-covid period.
- Number and value of digital payments have increased in June than January or February.
- Sale of small cars and two wheelers have started showing good pick up especially in rural markets.
- GST collections recovered to 90,917 crore for May collected in June after plummeting to 32,294 crore in March collected in April, which show signs of recovery in the economy.
- A Chinese mobile company booked over one lakh units of its latest smartphone within minutes of launch costing over Rs.50,000 per piece despite calls for ban on Chinese goods.
- Tata Motors tripled the number of cars it produce in June than in May.
- We had good season of rabi crops. We expect monsoon to be above normal that will yield better kharif crops too.
- And when you scan economic newspapers of past few days, you shall find many small but such good news.
And you shall find many such small but positive news appearing in newspapers of late. There are stories of how entrepreneurs utilized their otherwise dysfunctional units due to lockdown to manufacture essentials that were in high demand during the lockdown. Many of them immediately switched to manufacture mask and sanitizers and made decent profits. Remember our ability to adapt to the situation.
What Should an Investor Do
We believe corona situation in India will peak out over next two months. Problem of migrant workers will not play much as good number of them (skilled) have already started travelling back to their place of work. China’s situation will take some time to settle as both sides will use this opportunity to negotiate hard and try to settle many old issues to their advantage. USA’s situation will remain unstable till they have their elections. Fear of recession in many developed countries does sound real but its actual position can be assessed only once they have recovered from corona.
India is already under lockdown v.2. As said earlier, it will take over two months for corona to peak out and then gradually slowing down. A grand consensus seems to be building up that corona is not as dangerous as it is hyped to be. One has to exercise caution to avoid infection and increase immunity to counter it.
If position worsens badly especially with respect to number of deaths being reported due to corona than it may force government to enforce complete lockdown again. Though its chances are much lower but if this happens it will cripple the economy. Otherwise we have the ability to adopt to living with corona fears and much sooner than expected will be functioning at our full capacity. We may even surprise the world with positive GDP figures for the current financial year.
My confidence emerges from the fact that MNCs with all kind of powers still can’t beat AMUL- a co-operative brand. Patanjali despite all opposition, legal enquiries instituted against it etc. has gained prominent position in FMCG and is all set to threat position of many pharma companies. And the best Bajaj & other two wheelers companies have thrown China out of completion in world’s 2 wheeler industry. And there are many other examples where we are establishing our superiority over others. Remember our ability to adapt and confidence or guts to work on it.
We strongly believe unless something tragic happens India will bounce back to its vigor with festival season starting October and will be fully functional by the year end.
Where to invest
We expect equity market to remain volatile for another 4-6 months before pausing for big jump. It has risen sharply over last few sessions which has no support from fundamentals. You may plan partially exiting equity if Nifty crosses 10,800 within a week or crossing 11,200 in July. Markets will give you opportunity to enter again at attractive levels.
And do maintain a good mix of debt in your portfolio. Gold though currently at its highest level, do keep some to balance out your portfolio. Keeping cash may prove to be very beneficial. You can maintain 10-15% cash in your portfolio, increasing it by dis-investing your equity portfolio if markets continue to rise so fast without support from the economy. Markets also adapt to economic reality over period of time.
Please consult your InvestmentMitra for reviewing your portfolio and check if you need to take any action now to rebalance it.
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2 comments on “On Cross Roads”
Thank you sir