There have been large scale redemptions globally as FII’s raised cash from emerging markets. Following charts show the flows (both foreign and domestic) to and from India over the past six years:
Covid 19 has without a doubt adversely impacted the country’s short term growth prospectus, and all this amidst a structurally slowing down economy is exacerbated the grim outlook. It has disrupted retail sales including supply chain disruptions, deferral and postponement in consumer discretionary segments, pressure on EMI for loans taken from Banks, NBFC and MFI and very high adverse impact on daily urban wage earners. Additionally, the outbreak has severely impacted the export sector, impacting roughly 40% of the total exports till now.
Covid-19 outbreak is an unprecedented event and jump starting the response to flatten the curve and lower the burden on the Health System holds the key and hence justifies the harsh actions taken. An apt example is Taiwan having high traffic with China which implemented a system whereby every citizen has their digital medical records along with their travel records updated so that authorities can isolate and treat them.
In India currently GST reform, cut in corporate tax rate coupled with oil price crash are three main triggers that may help investors navigate through these turbulent times. Going forward we expect many countries around the world to redefine their relationship with China as far as sourcing of products is concerned and India would be a major beneficiary of this move.
Global financial markets have been facing some persistent bull market led by many unstable trends and corporate debt, Covid 19 has just exposed the bloated balance sheet of companies.
The silver lining for investors in all of this comes from the fact that India vis-a-vie the various developing countries (who are slipping into recession) still have a positive growth outlook. We are a large importer of oil which has seen massive demand destruction over supply, this has pushed the oil prices down. This has caused benefits over 1 percent of our GDP in terms of reducing net imports. Also a steep price cut in crude oil has brought better margins for companies having a certain degree of pricing power.
Turning to the banking sector the outbreak coupled with yes bank debacle has severely impacted smaller banks in the country, large banks are expected to witness a market share gain.
In India while the known sectoral damage to Airlines, Transportation, Multiplexes, Hotels, QSR, Travel & Tourism, IT/ ITES and small ticket personal loans are very obvious, one must not forget that in each of the above sectors emotions are short term while value is long term.
Revenues to certain FMCG companies selling essentials as consumers stock up in the wake of the pandemic, however due to disruption in production this trend may reverse in the coming times. Despite the RBI action and FII outflows from debt and equity markets, India’s FX reserves is at a healthy $480bn. In the Indian context it is now emerging from the data post demonetization that Indians will continue to own stocks despite FII selling as valuations fall below long term averages. Several PSU companies today are already having earnings yield greater than bond yields.