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Yes. I think things are improving. If you ask us, we started our lockdown late January and things improved a bit towards early mid-March and then we had people returning to Hong Kong. That led to a further pickup in cases, and that is when another work from home or mini-lockdown came in. But things are much better from where it was a month-and-a-half back.
I think a similar situation plays out for India. If you ask me, we need this 21-day lockdown. Once it happens, people have to exhibit some restrain for a month or so, and hopefully in three months, we should be out of this.
But can you say that for the markets at this point in time? We have had some tough last fortnight. Does it seem like things are getting any better? Have we seen the worst of it all?
Markets are always forward looking. If we go back and say why were the markets getting sold off in early March, it was because people were worried that the government will not be able to handle this big deluge of coronavirus cases. But the government has been swift, which is where one is positively encouraged by the response and after that it is fingers crossed. So that is where we saw 35 per cent correction in equities in last one month. That was the local aspect of it. There was a global aspect also, because we saw credit markets literally freeze globally.
We saw FII outflows of record $6 billion in less than a month. So that had an impact. But now, as we see synchronized stimulus from governments and central bankers globally, things are much better than probably a week back. That is the comfort from an India perspective.
Now, you will not have relentless exits from equities, which were happening until a week back. Now all the eyes are on the government and RBI as to what do they do to make sure that businesses do not go down in this 21-day shutdown.
US Senate has finally approved that $2 trillion economic relief package. What is the kind of impact you see of that on emerging market flows as well as the dollar?
That is clearly positive in the medium term. Right now, risk aversion is so high. Most of the data points almost indicate a panic level in terms of attitude towards equities, markets, etc. But some of these high-yield spreads are compressing and risk aversion is normalising. What it means is that flows would come into equities, flows would come into emerging markets. Within EMs, just like it happens between largecaps and midcaps, countries that have tackled the coronavirus well will perform first. So as we talk, we have seen China perform well. We have seen Korea, Taiwan perform well. In a month or so, as we see India come out of this lockdown well with not too many cases, a similar story will play out. So ASEAN like the Philippines, Vietnam markets would also do well.
You talked about waiting to see what India is doing in terms of stimulus. We are all waiting for that. Would you stay on the sidelines till there is some clarity or would you look for opportunities? If you do, where would it be – IT, pharma, financials where would you look?
It is difficult to time it, more so in such volatile periods. But the valuations are very cheap. So if you look at India ex-consumer staples, price-to-book is even below the GFC lows, as low as in 2001. On earnings, it is one standard deviation below mean. So valuations are in a fairly attractive zone. What you want to see is how the government handles the situation. We have seen governments do well in controlling this virus by such lockdown. Now we need RBI and finance ministry to feel the urgency and that is where sooner they do it, the better it is. Because the more they delay, the bigger will be the stimulus requirement.
There are expectations that we should get something over the weekend. That is something being watched keenly. Once it comes through, there would be a deep opportunity in financials, industrials, utilities and real estate. Consumer staples may give you some upside, but there is better risk-reward in other sectors. This is all contingent on the virus coming under control in next 30 to 45 days.
How about buying life insurers? There is going to be more fear, more concern about family care now. In that context, do you think globally insurance companies — especially life insurers – demand a relook both in terms of assessment and also in terms of need and growth?
Absolutely. This is one space we have liked, and these names have got smashed post Budget. Investors went overboard again in terms of saying look people are not going to buy life insurance. But I absolutely agree with you, this is what we are seeing on the ground and that is why we like these names in the first place.
Consumer tastes are changing, their preferences are changing and people realise that they need a certain amount of insurance for their families to have the same kind of livelihood tomorrow that they are having now if anything happens to the key earning member. So I think life insurance is a structural story.
Apart from financials, in some of the energy names risk-rewards are very favorable now. Telecom is something we will add. So there is deep value in the market. If somebody has two- to three-year timeframe, it is difficult to see how one would lose money. The risk-reward is very favorable, but obviously there is a tail risk that policy response comes too late, policymakers are complacent or this virus completely gets out of hand.
What is your understanding on what will happen to IT? One side is this propeller — which is coming because of weak currency — but IT companies essentially have manpower business. Because of this lockdown, no one knows what will be the impact on their client delivery and client engagement. Would you rush in to buy IT, considering that those are good cash generation companies or would you wait it out now?
People are looking beyond these one or two months. We were interacting with some of these IT companies, it is work from home for everybody. The idea is to just ensure that you run the businesses and processes keep working well and then incremental sales growth is going to be pushed back, deferred.
So these are good cash generating companies I agree with you. But the upside there would be limited. The bigger challenge which we will face for these companies would be in 12-15 months from now. Big banks will come under pressure because of near-zero interest rates, and a lot of these IT companies have close to 30-40% of their revenues coming from the BFSI sector. So it is to be seen if those IT spends get curtailed from a medium-term perspective. So they are okay in the near term. If the rupee depreciates, they will offer good downside protection. But in the longer term, I am not sure of big upside in these names.
If you were to take a view on Bank Nifty, which is a combination of private banks and NBFCs, or take a view on Nifty — which is a combination of banks plus 60% of other businesses like consumer, IT and pharma — where do you think more money could be made in the next one to two years?
These are two hypothetical situations we have been discussing. We were discussing that this virus remains under control and the government acts and RBI acts quickly to make sure that there are no large-scale defaults in the economy. Clearly the risk-reward is a lot favourable for Bank Nifty. Outside Bank Nifty, obviously Reliance offers a promising opportunity because it has gone beyond pure energy play with what it has done in telecom and retail. So I think there are interesting opportunities. What may pull Nifty down would be IT and staples. IT, because of much lower growth rates in the future than in the past, and staples because of expensive valuations as the starting point.
How fast do you think the recovery in consumer staples is going to be? I guess they are going to see an artificial bumpup in volumes for this quarter because of all the hoarding and stocking up. But what happens post the lockdown, because the supply chain dynamics and linkages there would get choked up very soon?
If we look at the numbers for December quarter, we had some of these companies guiding for subdued numbers. We have seen a kind of a pre-emption in March demand. In the last couple of weeks people did stock up on all these hand sanitisers, soaps, etc, but beyond that, I think there is a bigger upside in the consumer discretionary.
Consumer discretionary has almost come to a standstill, but from a longer-term perspective the penetration story remains intact over there. These are the companies which benefit from electrification, these are the companies which benefit from the availability of consumer finance. Their market-caps are much smaller compared with the opportunity which is there. So if somebody has a three year timeframe, consumer discretionary offers a much better risk-reward than staples, but till the time we have clarity on the virus spread, there would be investors who would prefer the certainty of staples over the volatility of discretionary.
How long do you think would it be before we see a recovery? What is the kind of timeframe you are looking at? Historically, the recovery time has come down, but it is still about 18-24 months even if we take a look at the last two times that we have seen this kind of a knock? What do you expect this time around?
I will again break your question into multiple parts. First is, if we take the China example of 2003 when SARS broke out, markets traded the second derivative, which is the growth in cases. So if in the next five to seven days the growth in cases plateaus or goes down, that is what would give the market some comfort that look the government has control on the virus spread, and the cases are not going to grow. That is where you will see the first bottom for the market.
Historically we have seen it takes about nine to 12 months for markets to recover. You are probably alluding to the demonetisation event, but what is different now is the big global stimulus. This is the kind of stimulus that came during the GFC. Now we have got Germans coming ahead with a huge stimulus. So the global stimulus is huge; monetary and balance sheet expansion by central banks is huge. The market has lost 35%. And we can get those gains back in next 12-15 months.
We are in a world which has seen a lot of these external shocks coming through — whether it was US-China trade war last year and then we have this coronavirus. So it may not be a bad idea to have a market stabilisation fund. Most countries do that. Look at China, they had close to 80,000 cases, they had foreign outflows of $15 billion from their local market, yet the market was down only 10%. In India we are down 35% on barely $5 billion of outflows. So $5-10 billion of market stabilisation fund would do well from a medium-term perspective, else because of this volatility in the market most investors focus only on largecaps and smallcaps and midcaps get deprived of capital. From a longer-term perspective, it may be a good idea to think through this. Let us put a market stabilisation fund in place and that can lead to a healthy functioning of the financial system.
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