We have spent a lot of time during the lock down understanding the past trends, speaking to experts, and attending webinars of international speakers
After listening to varied views we initially felt there was more of confusion and no consensus. We believe better clarity will emerge only in June 2020, where business is expected to start off. However, we thought of collating views and sharing few thoughts based on these views
We are discussing few vital aspectsto be considered which will lead the structural change or will change the way businesses will be done going ahead and likely impact on markets and industries.
People are expected to avoid crowded places and follow social distancing even post the recovery. This means avoiding large scale wedding functions, avoiding markets, preferring small retail shops over malls, avoiding theaters and crowded trains, buses, restaurants. Which would mean spend on restaurant is likely to go down and people prefer cooking at home.As a result, shops like D-Mart and other retail grocery stores located in big malls with good space will be preferred. We expect these guys may benefit with increased volume due to higher consumption and over stocking by households.
Cash levels become extremely critical during lock downs, companies having good amount of cash on books will be able to handle this event. Leveraged corporate will find it difficult to cope with lockdown.
Most of the businesses need leverage by very construct, like all financial companies need leverage does not mean all NBFC and Banks will be in trouble. But businesses where demand is going down, and debt is high are red flags. In times like this where there is demand destruction few businesses will find difficult to live with leverage.
Consumption pattern might undergo big change and people are expected to avoid luxury brands over value for money. More spend on consumer discretionary, health,fitness, and healthy food.
It is expected that value buying may go up and brand loyalty may be at threat. Overall spend is likely to be affected by job losses, salary cuts and reduced bonuses.
NBFCs are going to be affected with increased NPAs, lower demand for white goods and virtual stoppage of unsecured lending. Need for borrowing though is likely to go up and NBFC will need to reinvent products to grow. Well managed NBFCs may have lesser issues as their cost of funds is not going to go up. They may gain market share as most of the weak hands may go out of business.
Mode of transport will change. Preference to personal vehicles than public transport and shared mobility like carpooling will end. Demand for two wheelers and lower end cost effective cars.
General travel will be avoided as far as possible including airlines, more investment is expected in technology and virtual meetings. Spend on new high-end cars will go down and people will prefer to repair and refurbish (tyres, batteries) them for next couple of years.
Most of this lock down period, people worked from home. We know of corporate in Pune, which made 2500 employees to work from home successfully. Though this corporate is from IT space, but it is revealed that some businesses or particular segment of business can be moved like this and it was great cost savings potential. We expect next leg of investment to happen in technology/ IT infrastructure than building office complexes
It’s a buzzword now, after losing a substantial 2/3 of the year to get back to normality, the entire focus will be on cost as businesses can’t do much about demand side immediately. The discussion is about good cost and bad cost, where good cost areyour capable employees whom the businesses would like to hold back. Bad costsare where you can make cuts without affecting business, sentiments may be kept aside while taking some harsh decision post lockdown.
Health and lifestyle
More spend will happen to maintain good health than we expect.Even a new start-up with a supply fresh food adhering to safety standard may emerge as a winner. Lifestyle management will emerge as a new vertical. Organic food, healthcheck-ups, gym and vitamins spend will go up. Insurance penetration is very low anyways, that will get big boost with Pandemic. Life Insurance sector will benefit immensely. More spend expected on hygiene products, toiletries, and disinfectants.
Logistic will find importance as goods movement without any human intervention is the key.
With lesser people traveling and commuting, last mile delivery becomes important. E commerce will grow as people will avoid fetching basic goods themselves. Warehousing,trucking, and deliveries will gain ground. If people decide to travel less, then goodsmustmovefaster to the end consumer, so even courier companies may benefit.
Travel and Leisure
Overall travel would go down and cost of travel will go up if peoplemust follow social distancing norms.
Avoidable travel, foreign tours for MICE may be first to get axed. Airlines may find it difficult to survive despite lower oil prices. Affordability factor will hamper leisure trips to certain extend as disposable income will go down.
Telecom may come out to be a big winner with increased data and talk time, they will reinvent new plans to make money from this change.Volume growth will come with additional connections at home and office. Data usage is likely to go up as more and more people avoid travel.
Recovery depends upon Government response this time in India, as personal debt and corporate debt is much higher than the last fall that we saw in 2008.Thus ability of corporate to respond and cushion this shock is extremely limited. Gross domestic savings has gone down in last 12 years so personal debt is also very high and savings rate was very low. It is expected that recovery in market would solely depend upon relief package, which at present is a measured response. No big bang relief is expected as we will end up with 6% fiscal deficit for 19-20 as opposed toearlier estimate of 3.80%. Next year, looking at package,Fiscal deficitis likely touch 10% of GDP.Having said that, liquidity floating around across globe will drive our market.
Higher savings and intent to invest than spend will drive market even before economy recovery as more money will start flowing to equity markets. It is usually seen that when fixed income rates are low, it disincentivize to invest in fixed income and more money tends to flow in equities. Industries are awaiting financial package, and this will set the tone for the market in the near term.
Looking at past trend, it is expected that only 14% of the industries are likely to grow faster than before converting this event into opportunity by adaptation, innovation, and financial discipline.
Idea is to be part of these winners and with good monsoon, lower interest rates, lower oil prices, lower commodity prices it is very much possible that Indian promoters will come out winners.
Shape of recovery is a big debate and there is no consensus.We believe it could be either elongated U or W looking at Japan and Singapore. There is good chance that in country like India, we may see few relapses. We can only hopethat we would be able to avoid L shaped with early revocation of lock down.
Fixed Income Market
With volatile March, now things have more or less settled down. 10-year GSec is around 6.21% and steady call, most of the returns are in line with the expectation. Liquid fund returns are bound to be lower and one has to moderate expectation with market reality. In our opinion, it is better to stay at the lower end of the curve, with a quality bias for any short-term money.
We prefer staying with Banking and PSU debt funds or AAA corporate bond funds with quality papers for investments with 3-year plus horizons. Government borrowing and inflation number going ahead will determine future course of yield movement
This pandemic may lead to cold war and most of the countries will adopt protective trade policies toa certain extent
Oil Price crash can change geo-political equations and can lead to trade war.
Indian economy is mostly domestic with 15% of GDP coming from export and hardly 2% market share in international trade. India might benefit from cold war and isolationism
General sense is that demand for both commercial as well as housing sector will go down as low as 20% as quoted by eminent authority in the sector recently. With work-from-home policy, which may become permanent feature to large extent. Corporates have started re-negotiating lower rentals with landlords. Same is the case with malls, shops post Covid-19. Hotel occupancy rates will dive down, and they will find tough to make money without events, parties, and weddings.
Real estate is local play in India and situation may differ from city to city depending upon concentration of IT and ITes and supply situation. On overall basis things are looking negative for real estate sector.
We are still in the process of assimilating overall impact and feel that, it will be known only in June 20, whether we are able to start working after putting big fight with Covid-19.
Life will change for sure if not 360degree.