The world is going through an unprecedented crisis. So far, a few countries have deal with it in an effective manner including China, Singapore, South Korea and Taiwan. The blueprint from all these seems to be a complete lockdown followed by large scale isolation and testing. Experts including Bill Gates and Nassim Taleb and many others agree that this is the only solution right now. US and Europe have not responded well to the crisis as they didnt want to face the short-term but massive pain and economic cost this entails and took time to implement the lockdown and social distancing measures. India surprisingly went into a complete country-wide lockdown. It will probably not be as effective as developed countries due to the density of the population among other reasons.
There is a alternate view to the complete lockdown as well including Michael Burry of the Big Short fame. Their view is that complete lockdown may not be required in everywhere except for most densely populated places such as New York. In other places, they can open up business with social distancing rules and norms. This solution may work in developed countries but I doubt if this will work in India. In developed world, people are used to following rules and have a sense of personal space unlike in India where it is almost impossible to implement and get people to follow rules. Social distancing unless strictly implemented will not work on a voluntary basis in India.
Economically, this has been very damaging to the businesses. Some are affected directly and more adversely than others such as hotels, airlines, restaurants, retailers, manufacturing, etc. This is a one-time temporary shock to businesses and everyone is aware of this. What are the second-order and higher-order effects of this crisis?
When will it end and how life will be after that: after the lockdown is relaxed, the virus may still be out there. Life may still not return to normal as people maybe afraid to step out. If that happens, the demand shock to businesses will be more protracted and longer. The longer this lasts, the more damaging it will be for businesses as well as individuals.
Consumer confidence: businesses will struggle with this demand contraction. Due to the lower demand, they will be forced to downsize. The people who are laid off will spend less because they are unemployed. Even people who have jobs will spend less because of the uncertainty. This will lead to further slowdown in demand and further slowdown for businesses. Businesses will spend and invest less as well in this uncertain environment.
Financial Institutions: the demand for loans will go down as businesses invest less. FIs will be hit especially hard – one, default on loans to companies which are over-leveraged and can no longer pay back; two, lower demand for new loans.
International travel: I expect international travel to be affected for much longer even after the lockdown is released. What affect that will have on import and export of goods remains to be seen.
There is a lot of uncertainty right now and this has the potential to become a vicious cycle resulting in a long and protracted slowdown. The demand shock will be pervasive across industries. Discretionary spending will take a major hit including real estate, automobiles, consumer durables, etc. India was in a precarious situation to begin with with demand slowdown already visible across industries. The GDP growth has slowed down to a trickle in FY2020. Auto industry has been severely hit during this year and whatever the reasons, in hindsight demand slowdown was a major contributor. Because of the slowdown, banks and NBFIs have struggled with rising NPAs. In this environment, coronavirus will lead to further slowdown in demand. Blame it on my lack of imagination but I don’t see a scenario where we see a quick recovery. In fact, I do see a chance of the situation devolving from here. This is an unprecedented crisis coming on the heels of an already weakened economy.
We are facing a high uncertainty and high risk scenario. From a stock market perspective, I do see the potential for a long winter and there is a scope for further major decline in the coming months.
But this is not the end of the world. The timing may not be clear but the world will climb out of this crisis. And so will India. From an investing perspective, the crisis will provide an opportunity to invest in quality businesses at reasonable valuations. In India, most quality businesses have been trading at astronomical valuations but that is beginning to change. We need to find businesses which have the staying power and which will not only weather this crisis but come out stronger at the other end. Lets think about which are these businesses. I have written about some of them before and will write more about them as we progress through this crisis.
There is no need to rush now to buy stocks. Take your time and allocate capital through this cycle in a staggered manner. I think capital preservation should take precedence over everything as cash will provide the optionality to steal the bargains as they become available over the next few months.
Disclaimer: I’m not a registered investment advisor. None of the content published on this website constitutes a recommendation to buy a security, portfolio of securities, transaction or investment strategy. I write for educational purpose. Hence, please do your own due diligence and consult an investment advisor before making any investments.