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We are in an uncharted territory and we have not seen such a situation ever before in the past. We have dealt with wars, dealt with geopolitical events, terrorists attacks, change of regimes, spikes in commodity prices, especially crude oil and change of ideologies from communism to capitalism; but, the market has never faced such a situation before and one does not really know how this is going to actually play out because at the end of the day, stock markets are working on the basis of the economy and if something extraneous like this is going to impact the global economy, then eventually it is going to get reflected in the stock prices. No doubt it will be transient and temporary but the stock markets will take into account that there will be many challenges as far as earnings are concerned going forward and that is playing out just now. So, it is very difficult to take a call on the market at this point of time and the best strategy is to just stay put. Even if you have liquidity to invest, I would rather conserve it to wait for the end of this particular crisis and then look at putting it to place. If you are already fully invested, I think the time to sell is already gone and you might as well ride out this uncertainty and this crisis and whenever this problem is over and done with, all that we can be sure of is the recovery will be pretty sharp in terms of stock prices and the economy as well. So, I am in the camp which believes that whenever this problem is resolved, we would have a V-shaped type of recovery.
It is interesting because we are not convinced about the growth. At the same time, there does not really seem to be any so-called defensive pocket of the market either, even the few heavyweights that are the preferred names are being called highly valued. So where does that really leave us? What do we watch out for next? Even putting coronavirus aside, we seem to be in a tough situation unless there is some liquidity.
In times like this it is best for the investors to stay completely put even if you have liquidity to deploy it is better to wait for this crisis to be over and done with. And if you are already holding on to your positions or your investments and not have much cash in your portfolio you are better off just riding this particular problem because the time to sell was several points higher and at these points to knock off stock would not be a wise move. And as I explained earlier also, whenever this coronavirus problem is resolved and the world realises that they have found a cure or it is not spreading or this pandemic is now ebbing and eventually life will get back to normal, I am pretty certain that you will have a V-shape type of a recovery and that will be driven by lots of liquidity and improvement in sentiment and overall realisation that we kind of had a crisis and it is over and done with and now it is time to move on.
Where is that recovery going to come in from? I know you are saying that we will see one but how is that going to be backed by earnings? Where are we going to see actual delivery?
Many lessons have been learned from this particular pandemic and global supply chains will undergo a change maybe not immediately but over the next few quarters and years. India will play a very important role in that global supply chain. A lot of supplies, which were sourced by the Western developed countries from China, will now like to have a second supplier as well, especially Indian companies that are engaged in pharmaceuticals or speciality chemicals, auto ancillary, even garments and apparel. This particular scare is going to make many of these purchasing managers open up their eyes and genuinely think in terms of diversifying their supply chains and India will be a major beneficiary because we have the similar characteristics as China—large supply of raw materials, abundant supply of labour and now even the government policies are quite favourable with the corporate tax being reduced. So, I think there will be a kind of urgency to get manufacturing out of India for the global markets. Indian companies also which are exporting abroad may find that the environment has improved for them and customers are prepared to give them higher share of the business going forward. So the recovery, whenever it takes place, will be more in the export-oriented businesses than the domestic-focussed ones or the consumption-oriented businesses. My sense is, in the last two to three years, it was all about consumption stocks; maybe the next year or so, you could see manufacturing exporters. Not necessarily service exporters like software but manufacturing companies which have got good export business going. They will find their exports doing much better going forward because clearly this is an eye opener and if a country has to be shut down, then its impact on the rest of the world will be watched quite closely and several de-risking measures will certainly be taken by large MNCs.
What do you make of consumption names? Do you think consumption names are safe in such an environment? At least they are domestic-focussed, continuing to grow with new innovations and new strategies. Plus, they do not have debt.
Consumption will continue the way it has been and some of the companies may have bottlenecks because they have raw materials or parts coming in from China; so to that extent, there may be some shortages and missed sales over there but by and large, they will continue the way they have been; most of India has been unaffected by the coronavirus and I think whatever the variables were or the drivers were for consumption, they are more or less in place. Interest rates have come off and credit is gradually flowing into the market. We are in for a very good agricultural season as well. The overall down cycle in the economy seems to be coming to an end. As we know, all these economic cycles have a particular life span and this particular recession seems to be coming to an end; so from an opportunity perspective, what the investors should focus on are the manufacturing exporters. Something amazing could happen over there because once this particular situation is over, you will definitely see a lot of supply chains getting changed and that will be very beneficial for India. So from a tactical point of view, if an investor had a lot of his savings exposed to one investment theme called consumption, this is the time to sell off some of the high PE consumption stocks. We all know which names they are and gear into some of the manufacturing exporters, which have also moved up. But, I think still there is scope for these stocks to move up. They could be within pharma, especially bulk drugs, APIs, speciality chemicals, garments. There are many companies, even auto ancillaries; some of them do benefit because of what is happening in China.
The growth opportunity seems to be very high in some of the sectors that you mentioned but they have not seen any growth for a while; so are you saying that percentage growth for the next few years will be very high once the demand picks up globally?
I totally agree with you. I think the base effect also will benefit them and a lot of these companies will look at increasing exporting and they will require to set up new manufacturing capacity, do more backward linkage as they also review their supply chains. So the entire global manufacturing is going to undergo a definite change post this coronavirus because this is something new, it is something which we have never seen. This generation has never seen a situation like this where a country, which is the second largest economy in the world completely closed and and we saw what effect it can have on the rest of the world. Thankfully, from India’s perspective, we do not have many companies in the listed space which have exports to China. Globally, there is going to be a big problem. We have seen Apple and some of the other technology companies clearly say that they may miss their earnings because sales in China have been impacted significantly. Except maybe the exception of Tata Motors, which has a large presence in China, I do not think any large Indian company has got major exports to China. So from that point of view, it is beneficial. Also, I think that commodity companies may get impacted. We have seen a sharp decline in their prices as well; right from crude to metals. So they will have that transient effect in their balance sheets but by and large the new theory, the new game in town has to be manufacturing exports and one will have to look at these companies in new light and see how they can scale up over the next two to three years and what kind of growth prospects they can capture. Also, companies which are import substitutes may also benefit as Indian manufacturers try and source more from these companies rather than importing it from China.
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