Vijay Kumar Gaba

 With each report announcing further success in the endeavors of developing an effective vaccine for SRAS-CoV-2 (previously termed Covid-19) infection, the level of anxiety amongst the stock market traders and investors is rising disproportionately. Most of them appear anxious to find the best trade for the “normalization”. The fact that in past two years, the returns on investment for most of the investors and traders have been sub optimal, is further fuelling the anxiety. Most of them appear to believe that first mover will make extra ordinary gains, while the slow movers will miss this once in a decade opportunity.

Recent discussion with market participants in India, US and Singapore, indicates that they are exploring a variety of ideas that could give extra ordinary return in next one year. Some of the common ideas include technology, healthcare and reflation. Logistics also appears to be fast emerging as one of the favored ideas.

The following are the arguments I have heard from market participants in support of their favorite ideas:

Healthcare: The outbreak of pandemic has drawn attention of global community towards the lacunae present in the global healthcare system. A significant added emphasis shall be given to preventive healthcare; and building of capacities to handle subsequent outbreak of novel viruses. The endeavor to develop vaccine for SARS-CoV-2 pandemic shall provide new dynamics to the collaborative research in the field of pharmaceutical. And of course, the vaccine for novel corona virus does hold material profit opportunity for developers in next many years.

In view of these, the healthcare sector as a whole present material business and investment opportunity for next many years. Personal hygiene, nutrition, supplements, testing, vaccination, medical equipment (for new capacity building as well as upgrade of existing facilities) are some specific opportunities that are being talked about by investors.

Traders are however more interested in “the vaccine” for SARS-CoV-2 that will give immediate revenue to the developers and distributors.

I am inclined towards the investing opportunity in the healthcare sector, but I am not sure about the trading opportunity. In my view, pandemic is a highly sensitive political issue globally. Profiteering from vaccine will be difficult. In Indian context for example, the government has already indicated free vaccine shots for citizens. This means that the procurement of vaccine will be on government tender basis. Making extra ordinary profit in such a scenario will be difficult in my view.

Technology: The pandemic has definitely changed the way we live, work, and travel. Much of these changes may stay. Changes in technology platforms to incorporate the new digital protocols, consolidation of businesses and integration of processes, working from remote locations, need for higher security of data and IPR, in addition to the ongoing shift towards AI and digital, has created tremendous investing opportunity in technology sector.

Again, I am inclined towards investing opportunity in the technology sector, especially IT services; but given the fact that most of the low hanging fruits have already been plucked, I am not sure about the trading opportunities.

I have already written about my views on the so called reflation trade (see Hyperinflation - Highly improbable and Rush to gold as safeguard from hyperinflation could be quixotic

Logistics is a tricky area. I need to explore this a bit more. I shall share my thoughts on this in some later post.

 The latest quarterly bulletin on employment and unemployment indicators released by the Ministry of Statistics and Programme Implementation, Government of India makes interesting reading. The latest data presented in the bulletin in based on the Periodic Labour Force Survey (PLFS) carried out between July-September 2019, i.e., well before the lockdown forced by the outbreak of SARS-CoV-2 pandemic. The key highlights of the survey are as follows:

·         For the purposes of the Survey, the “Labour Force Participation Rate” (LFPR) is defined as the ratio of population which offers itself for employment, whether currently employed or unemployed. The “Worker Population Ratio” (WPR) is the ratio of employed workers in the total population of the country.

·         As per the latest data, in urban areas, LFPR was ~37%. For the young people (15-29yrs) the rate was at ~39%, while all people above 15yrs of age, the LFPR was ~47%.

·         There still exists a significant gender gap in the labour force participation in the country. The female LFPR is just 16% vs male LFPR of ~57%. Even in the younger population (15-29yrs) female LFPR is ~18% vs male LFPR of ~59%.

·         The WPR in India is ~34%. For younger people (15-29yr) WPR is ~31%, while for all legal workers (15yr and above) WPR is ~43%. In WPR also, a significant gender gap exists. The male WPR is ~52% while female WPR is below 15%. For population aged above 15yrs, male WPR is 68% while female WPR is ~18%.

·         More than 50% workers in India are either self-employed or are engaged as casual workers. Only ~49.6% workers have regular wage employment.

·         More women (57.4%) are in regular employment than men (47.5%). About 9% women workers are employed as unpaid helper in household enterprises. For male workers this ratio is ~4%.

·         In urban areas 62% workers are engaged in tertiary (service) sector. About one third workers are engaged in secondary (industry) sector. More female workers (65%) are engaged in services sector than male 61%.

·         Overall unemployment rate during Survey period (July-September 2019) was 8.4%. For youth (15-29yrs), the unemployment rate was at ~20.6%, while for all workers 15yr and above, the unemployment rate was 8.3%.

·         More young (15-29yrs) female workers (24.1%) were reported unemployed than the male workers (19.6%).

To conclude, we can say—

(a)   The gender gap in work force is alarming and does not augur well for the acceleration in the growth rate. If we juxtapose this data with the education statistics, we find that bridging of education gap between male and female population has not resulted in equal opportunity for female in employment.

(b)   Prevalence of higher unemployment amongst youth (15-29yrs) may be an indicator of serious skill mismatch.

(c)    High ratio of self-employed and casual labor, inter alia, indicates (i) lower employment elasticity in the organized sector and (ii) skill mismatch.

 Many readers have found my thoughts on “hyperinflation” yesterday little abstract (see Hyperinflation - Highly improbable). They want me to elaborate further on why I think that “hyperinflation” is highly improbable in foreseeable future.

I do not mind sharing the bases of my views on this topic. However, before elaborating my views of “hyperinflation”, I would like to clarify that when I say “hyperinflation”, I do not mean the term in its literal sense, because in that sense it makes no sense in the present day conditions. In the current context, by hyperinflation, we should understand episodes of sustained high inflation over a period of many months.

To put this in further context, please note that “hyperinflation” is generally used to describe situations where the monthly inflation rate is greater than 50%. At this rate, an item that cost Rs1 on January 1 would cost Rs130 on January 1 of the following year. At least, in past few centuries, there is no instance of a global episode of hyperinflation. In the first half of 20^th century there were few localized episodes – the most famous being Germany (1922-23) and Hungary (1945-46).

In past 70yrs, Peru (1980s), Venezuela (2014-16), Yugoslavia (1989-1994), Armenia (1992-93), Turkmenistan (1992-93) and Zimbabwe (2004-08) have seen episodes of hyperinflation. It is conspicuous that all these episodes resulted from either geopolitical reasons (war or collapse of extant political order) or civil unrest within the country resulting in collapse of political and/or financial system. Most of the countries facing hyperinflation were either closed economies or were facing global trade restrictions or disruptions. Besides, all these economies were too small to impact global economy, trade and commerce in any significant measure whatsoever. It would therefore be totally unfounded to expect that hyperinflation could strike a major economy of the world like US, EU, Japan, China, or India in foreseeable future.

Insofar as the probability of the episodes of sustained high inflation occurring over a period of many months in a major economy is concerned, I believe that the chances of that are almost Nil in short to medium term (1-10yrs), unless a major war or civil war breaks out involving some major economies of the world, causing sustained disruption in the global supply chain. The bases of my belief, as stated below, are simple and mostly intuitive:

·         Unlike in 20^th century, the global trade and commerce is now mostly dematerialized. The material, money, and labor move digitally. The rebalancing of demand and supply equilibriums is much faster and efficient than before.

·         Demand elasticity for most products, including food and energy has increased significantly. Alternative products and sources of supply are available to mitigate the impact of any supply shock.

·         The discretionary demand dominates the consumption in most of the developed and large developing economies. The inflation for discretionary products, like electronic gadgets, personal care services, etc. is already high. A large part of global consumption (in value terms) may not be essential and could be scaled back with small effort, without having any substantial impact on human life or global order.

·         The productivity of essential goods, like food, energy, clothing etc has significantly increased in past five decades and there is enough inventory of essential goods in the world to mitigate the impact of any supply shock due to natural calamity etc.

·         The global trade and commerce is much larger, faster and easier as compared to five decade ago. An episode of higher inflation due to supply shock is not likely to last longer.

·         The global economy is significantly more integrated now as compared to first half of 20^th century. The impact of higher inflation in a major economy is more likely to spill to the global economy rather swiftly. Hence, it is highly unlikely that supply shocks in a major economy will remain unattended by global trade partners for longer periods.

·         Given the technology and advancement in the weapon systems, the chances of a prolonged war between major global powers are next to NIL.

·         The “tons of money” that we are bothering about is actually not physical money. Most of it is ‘bytes of money” or digital money. If need arises, this can be destroyed as easily as it is being created. In fact, I firmly believe that all the money created by central bankers of developed economies in past 12years shall be destroyed by the central bankers, as soon as it threatens to spark unwanted inflation.

·         There is enough spare capacity of productive infrastructure and housing, etc. in large economies to absorb excess liquidity of money. I believe that US$1trn of additional flows could be easily absorbed in Indian economy in one month, without stoking inflation of essential items.

Insofar as the reflation of depressed commodity prices (many like Zinc and Nickle have traded below cost of production for many months) is concerned, it is not something to worry about. If at all, it may actually be a cause for celebration as it would signal normalization of the global markets and may mark reversion of extraordinary monetary efforts made in past 12years. Terming this as “hyperinflation” and rushing to the “safe havens” like gold etc. to safeguard from it would actually be quixotic, in my view.

 It was particularly gloomy winter evening of 2008 in South Mumbai. The global financial markets had their knees frozen. One of the top global financial institutions, Lehman Brothers had collapsed a couple of months back. Another global financial giant Merrill Lynch lost its identity to Bank of America. Some peripheral European countries were on the brink of defaulting on their sovereign obligations. The bankers in the financial hub of India (South Mumbai) were staring at massive job losses. Numerous businesses were on the brink. Many large investors had also suffered huge losses in their portfolios. For younger investors and bankers in their 20s and 30s, the conditions were totally unprecedented. The fear, uncertainty, scale of value destruction was overwhelming as they had not experienced anything like that before. Most of the then had seen 5yrs of strong bull market in credit and capacity building in infrastructure, energy and housing. Suddenly, all the credit started to look bad and all the capacities worthless.

The US Federal Reserve (Fed) had launched its Quantitative Easing Program (QE1) a week ago. Many other central bankers, including European Central Bank (ECB) was expected to follow the Fed soon. The commitment of central bankers to do “whatever it takes” had calmed the markets only slightly.

In this setting, I had the opportunity of hearing one of the most famous global commodity traders and fund manager in person. The gentleman was in Mumbai at the invite of a local fund house which had launched a Natural Resource Fund just a few months back. This gentleman, in his idiosyncratic style and attire made a passionate pitch for investment in global commodities. He strongly argued that the massive new money printed under the QE program of central bankers will inevitably result in hyperinflationary conditions in the global economy leading to sharp rise in prices of commodities. Quoting from the classical monetary theory books, he presented some hyperbolic charts and diagrams reflecting his projections of commodity prices.

I had many questions for the debonair looking trader cum fund manager, but I chose not to ask any, since I was fully convinced that inflation is certainly not one of the threats to the global economy in foreseeable future. Any question to the expert therefore would have been plain sophistry.

In hindsight, I feel it was a right decision to go with my conviction instead of arguing with the expert and weakening my conviction. As we all know that despite multiple rounds of QE and vigorous efforts to create some inflation, the global economy has continued to struggle with deflationary forces in past 12years. Many commodities are even yet to see their respective 2007-08 prices.

In past couple of months, the hyperinflation has again started appearing in headlines. Numerous reports and articles have been written on how the global economy is fast racing towards hyperinflation. Many strategists have suggested trades for this - gold and silver being the most common. Many traders have taken positions. The Natural Resources Fund launched in 2008 is being marketed again aggressively.

Some wise and smart traders and fund managers are calling it “reflation” instead of “hyperinflation”, indicating that the price rise may be short trading opportunity and not a global trend.

Regardless, my view continues to remain the same as it was in 2008. I strongly feel that hyperinflation, as we know it from classical monetary theory, is a highly improbable event in the modern economic conditions. The present day trade and commerce dynamics, technology, and demand-supply matrices do not support any extraordinary inflationary flare up. And if the hyperinflation premise based on imminent demise of US Dollar, it may also be unfounded.

 A few month ago, the banking and monetary regulator in India, the reserve Bank of India (RBI), assumed the responsibility of stimulating the economic growth, in addition to its primary responsibility of regulating & supervising the banking & money market institutions, formulating & implementing monetary policy to achieve the objectives of financial stability and price stability. Given the state of economy, no one could find any fault with the RBI assuming this additional responsibility. In fact the RBI was commended for taking this extra load.

It is very well accepted that a well-functioning, deep and robust financial market is a must for economic development. On Wednesday, the financial market regulator, the Securities and Exchange Board of India (SEBI) assumed the additional responsibility for reviving the sagging Indian economy. SEBI’s chairman reportedly said “SEBI is considering multiple steps to reboot the economy through financial market reforms”. He said, “It will be challenging to achieve the government’s ₹100 trillion investment target for infrastructure by 2024-25 unless the bond market is adequately developed.”

Market regulator recognizing their role in the overall economic growth and development of the country is a very comforting. They committing to efforts for promoting economic growth and development is also welcome. However, the regulators actively assuming responsibility for growth may not be appropriate after all. All institutions and all citizens have a defined role in the functioning of the economy. If all perform their assigned roles as per their best abilities, the growth will happen automatically. The growth is hampered when the one or more segments of the economy fail in the performance of their assigned roles.

It is widely recognized that crisis in financial sector is materially responsible for economic slowdown in India. Obviously, it reflects poorly on the RBI’s ability to regulate and supervise the financial institutions and delivery of credit.

In this context, it is pertinent to note the conclusions made in a recent Working Paper of RBI, titled “Bank Capital and Monetary Policy Transmission in India”. The “paper examines the role of bank capital in monetary policy transmission in India during the post-global financial crisis period. Empirical results show that banks with higher capital to risk-weighted assets ratio (CRAR) raise funds at a lower cost. Additionally, banks with higher CRAR transmit monetary policy impulses smoothly, while stressed assets in the banking sector hinder transmission. Recapitalization to raise CRAR can improve transmission; however, CRAR above a certain threshold level may not help as the sensitivity of loan growth to monetary policy rate reduces for banks with CRAR above the threshold. Therefore, it can be concluded that monetary policy can influence credit supply of banks depending on their capital position. (emphasis supplied)”

The paper also concludes that “Presence of non-performing assets in a bank also weakens monetary policy transmission and lowers the loan growth rate. These results support the need for bank capital regulation in India.”

Similarly, multiple scams and malfunctioning of securities’ market institutions like Mutual Funds and Stock Exchanges have negatively impacted the investors’ sentiments. SEBI must share some responsibility for this also, and focus more on “Regulation” rather than “Reforms”. For, “Reforms” is a function of policy making and not of regulation.

A large section of the market participants and investors believes that “over regulation” and “misdirected regulation” by SEBI in past few years may have caused more than damage to the capital markets and therefore economy than SEBI’s reform measures would have helped anyone.

In my view, building a vibrant retail debt market is imperative for the sustainable economic growth of the country. But this is a function of the government. SEBI’s role should be limited to efficiently regulating the market.

 In past one month I have read a lot of commentary about the smart investing, sectoral shifts, trade rotation, reflation trade, emergence of old economy etc. in the India equity markets. I find it pertinent to note the sectoral performances over three time periods – One year; Since Lock Down (25 March 2020); and Past three months when the unlock exercise meaningfully started.

Some of the key features of sectoral performances over these time frames could be listed as follows:

·         Nifty has given positive return over all three time frames, but one year return in miniscule 2.6%, much lower than the bank fixed deposit or liquid fund return.

·         Only two sectors IT and Pharma have consistently outperformed the benchmark Nifty over all timeframes. PSUs as a sector have been consistently the worst performer on all time frames.

·         Energy, Infrastructure, and PSUs have been worst performers in past three months. This is in spite of the enthusiasm in the heavyweight Reliance Industries.

·         Auto sector has performed well post lock down. While FMCG has mostly stagnated in past three months, underperforming Nifty over one year time frame.

·         Financials have also underperformed majorly over all timeframes.

·         Despite all talks about reflation trade, metals have underperformed over one year and 3 month timeframe, marginally outperforming the benchmark Nifty since lockdown.

On a closer look the market may appear fast rotating to relatively under owned sectors or sectors with material short positions, but when looked from a distance, it could be clearly seen moving in circles, going aimlessly round and round. The investors should therefore cut out the noise, and sit tight with their portfolios. In the end quality businesses that negotiate the pandemic and economic slowdown well and maintain sustainable growth shall indubitably do well. Jumping one sector to other in the hope of making some quick bucks will only lead to frustration. Remember, grass on the other side may or may not be greener, and the traffic in the other lanes may or may not be moving faster.

 In the aftermath of devastation that took place due to the second world war (WWII), some key global institutions were created and multilateral agreements signed to (i) avert chances of another major war; (ii) enhance global cooperation for accelerated reconstruction work; and (iii) promotion of globalization of trade and commerce to ensure equitable growth and development. Bretton Wood agreement signed in 1944 was one of such efforts.

The Bretton Woods agreement established the U.S. dollar as the reserve currency for world. The idea was to prevent competitive devaluations of currencies, avert trade wars and promote international economic cooperation for growth & development. The Bretton Wood signatories agreed to maintain fixed exchange rates between their respective currencies and the US Dollar. The US dollar in turn was pegged to the price of the gold.

Until WWI, most countries followed the gold standard for their respective currencies; which essentially meant that they promised to exchange their currencies for gold of equivalent value as per the current international prices of gold. This significantly constricted the flexibility in their monetary policy, as only a few countries had enough gold reserves to back their monetary requirements for development efforts needed in post war period. Abandoning the gold standard, they printed massive amount of money leading to hyperinflation, which eventually led to great depression and another great war.

Post WWII, most countries considered reverting to gold standard. However, since at that time, US had held more than three fourth of global gold reserves at that time, it was felt that making the gold pegged USD the reserve currency, instead of gold, would provide the necessary flexibility in monetary policy (since unlike gold, the USD supply could be flexible) to support growth and development.

The energy price led stagflation in US eventually led to the demise of Bretton Wood agreement. To get the US economy out of stagflation (no growth and high inflation) President Nixon sharply devalued the USD. Thus sharp devaluation led to a run on the US gold reserves, forcing the US to unpeg USD from gold prices and thus violating the Bretton Wood Agreement. The gold peg ended in 1971 but USD continued to remain the reserve currency of the world in absence of a viable alternative.

Last week, Kristalina Georgieva, IMF Managing Director, in her speech called for a new Bretton Wood Moment for the world (see here). Comparing the damage to the global economy caused by Covid-19 pandemic, she emphasized on the greater need for global cooperation to put the global economy back on growth path. She said, “Today we face a new Bretton Woods “moment.” A pandemic that has already cost more than a million lives. An economic calamity that will make the world economy 4.4 % smaller this year and strip an estimated $11 trillion of output by next year. And untold human desperation in the face of huge disruption and rising poverty for the first time in decades. Once again, we face two massive tasks: to fight the crisis today — and build a better tomorrow.”

She further adeed, “We face what I have called a Long Ascent for the global economy: a climb that will be difficult, uneven, uncertain—and prone to setbacks.

But it is a climb up. And we will have a chance to address some persistent problems — low productivity, slow growth, high inequalities, a looming climate crisis. We can do better than build back the pre-pandemic world – we can build forward to a world that is more resilient, sustainable, and inclusive. We must seize this new Bretton Woods moment.”

She specifically called for “Prudent macroeconomic policies and strong institutions”, “people centric policies” and “climate change” as three imperatives for the new system.

Obviously, the emphasis is on greater global cooperation, sustainability and equality. Unfortunately, a number of analysts, traders and strategists have read her comment to mean return of gold standard.

Neils Christensen, quoted some of the popular comments in his blog post (see here) highlighting how the people are misreading her comments for a BULL call on gold—

“Gold is on its way back to monetary policy in a direct way. The IMF last week confirmed they WILL NOT sell gold reserves. Now they are calling for a new Bretton Woods arrangement. WELCOME TO THE ERA OF GOLD ? — Gold Telegraph

Imf calls for a new Bretton Woods. A new gold standard. Sit tight. Evidence is piling. — Gold Ventures

IT'S OFFICIAL IMF CALLS FOR 'A NEW BRETTON WOODS' 'A New Bretton Woods Moment'— Willem Middelkoop

A New Financial System Backed By Gold. It Will Never Happen You All Said Bretton Woods Was A Gold Backed Monetary System. The Best Is Yet To Come? Baba & Riddlers”

In my view, a new global order will definitely emerge out of this pandemic. The new order will address sustainability and equity issues. Gold will not be a key component of the new order. USD may retain its dominance but it shall face serious challenge from other currencies, including the digital currencies.

 Last weekend I did my annual festival market check. This year, besides the main markets of Delhi, I visited some local markets in predominately lower middle class areas; and some markets in rural areas of North Delhi. I managed to speak with some very large importer and traders of consumer goods; auto dealers, farmers, real estate developers and owners of leased properties. Based on my observations, interactions and information, I would like to share the following feedback with readers:

·         The overall demand situation this festival season is materially worse than the last year. It is pertinent to note that the last year was also not good per se.

·         A large importer and trader dry fruits, mainly almonds and walnuts, indicated that global dry fruit prices are down over 25-30% as compared to last year. In India despite supply disruptions due to broken logistic chain, the prices are lower as compared to last year. The retail demand for almonds and walnuts has seen sharp rise as these are seen as immunity boosters. However wholesale demand from sweet and confectionary makers is very poor. Overall, he expects 30% lower volumes this festival season.

·         A large importer and trader of confectionary, mainly chocolate, lamented both supply and demand issues for poor business. As per him, import of confectionary was greatly restricted due to breakdown in global supply chain and slow clearance of consignments at Indian ports. He cited 3months delay in clearance in his inbound shipments. On demand side, the festival gifting demand is very slow, especially the corporate demand. Retail sale is gradually picking up but still materially lower than last year.

·         Two famous sweet shops in Delhi have witnessed gradual pickup in demand in past two weeks. The sales are about 50% lower as compared to last year. The delayed and curtailed marriage season and minimal corporate gift bookings are major sentiment dampeners. They see a definite trend in lower affordability.

·         Textile traders, both wholesale and retail, also cited very slow return to normalcy. None is expecting to reach the 2019 level of demand even in 2021. The demand from rural markets in neighboring states is very poor. Shorter marriage season, restrictions on number of guests, poor affordability, slow return of migrant laborers, and high inventory are bothering the textile traders. Most of them are staring at significant inventory write off.

·         It is well known that in many communities, the marriages are arranged with a pre-determined budget for the bride side. The people from these communities are indicating payment of more cash & jewelry, higher end automobile and communication devices to compensate for the lower spending on ceremonies.

·         Building material and furniture dealers appeared more sanguine about return to normalcy. They are seeing better than expected retail demand for home improvement and replacement. For the wholesale demand, inquiries are good. They hope for better start to 2021.

·         Auto demand has picked up well. Two wheelers strong due to non-availability of normal public transport and fear of using public transport. Cars at pre lockdown level which was not great per se. Tractors and SUVs continue to see strong demand, reflecting the faster recovery in rural demand.

·         Home decoration item importers and traders are staring at a washout. With little fresh arrival and low inventory, they expect festival sales to be 50-70% lower. Contrary to popular expectation, the demand for Chinese items remains strong.

Marigold flower prices at Rs70-75/kg, are one third of the last year. Even at these prices demand is poor.

·         The scene at local markets in lower middle class colonies and slums, is that of despondency. The need for clothing, utensils, and other household items is visible but the demand is lacking due to poor affordability. The markets are crowded as usual but the sale is much less. People are constantly looking for deals to suit their pockets.

·         The markets in rural areas are though much better off. The sale is brisk and people are not averse to up-trading.

·         The real estate developers and dealers highlighted that the number of inquiries has increased significantly in past one month. These inquiries are however not yet converting into deals. They feel it will pick up strongly once registration offices begin working normally.

·         Owners of leased real estate let out as PG accommodation, working women hostel, shops etc indicated significant vacancies. They do not expect normal tenancy at pre lockdown rental to be restored even in 2021.

·         Almost everyone complained of poor working capital financing. NBFCs and Private sector banks have materially curtailed working capital and small capex financing due to poor quality or illiquidity of the collateral and tighter credit norms.

·         Almost everyone is working with lesser number of workers compared to pre lockdown period. No one indicated returning to normal workforce level in 2021. Most traders are focusing on survival for 2021. Growth does not seem to be a priority for now at least.

·         Farmers in Delhi villages were surprisingly well aware of the implications of the latest legislative changes relating to agriculture sector in India. Most of them believed that these changes are structurally positive for the sector; regardless of the noise being made by the opposition parties and some NGOs. (Caveat: The infrastructure, resources and access available to these farmers is very different from an average farmer in the hinterland. Their opinion may therefore not be reflective of the mood in general.)

·         Most people I interacted with and observed seem to have accepted Covid-19 as an uninvited guest in their house which cannot be wished away. They have learned to live with it and are willing to suffer some losses (monetary and human life) for their freedom to work and move around. The public campaign for safety against corona is totally ineffective in most cases and counterproductive in many cases. For example to avoid listening to Corona caution played before each phone call, most of the people prefer to use Whatsapp call now. Inappropriate, dirty and unhygienic face masks are hanged around chin to avoid monetary fines and harassment by authorities. Hand sanitizers have vanished from most public offices. No water is available in the tanks placed in public places for hand washing. No one could care less to discuss whether the government handled the pandemic efficiently. They just want to move on to lead their normal life.

 With each passing day, the realization is growing that it will “years” not months or quarters before the normalcy returns to the global economy. Regardless of the statistics on global trade, national income and corporate earnings, the impact of pandemic on humanity, especially poverty, inequality, and suppression is overwhelmingly devastating. The pandemic has indubitably undone the decades of efforts in poverty alleviation and public health in numerous developing and underdeveloped countries.

As per a recent Bloomberg report based on a study conducted by the World Bank and Philippine’s local agencies, “almost half of shuttered businesses were unsure when they could reopen”. As per the report, “in emerging parts of Southeast Asia, where a wave of job losses and weak social safety nets mean millions are at risk of losing their rung on the social mobility ladder. The region is likely to come in second behind the Indian subcontinent in charting the number of new poor in Asia this year.” This points to a long, drawn-out recovery. Southeast Asia’s GDP is estimated to be to be 2% below the pre-Covid baseline even in 2022.

As per last year’s projections, South Asia was expected to add more than 50million people with $300bn in disposable income to middle class strata. This attracted many global corporations to invest huge amounts in building capacities in this region. With the poverty levels rising and prospects of growth acceleration fading, the viability of these capacities is now questionable.

As per the Bloomberg report, “As many as 347.4 million people in Asia-Pacific could fall below the $5.5 a day poverty line because of the pandemic, according to the United Nations University World Institute for Development Economics Research.  That’s about two-thirds of its worst-case global estimate, and underscores the World Bank’s forecast of the first net increase in worldwide poverty in more than two decades.”

As per HSBC research, The magnitude of the economic free fall in Southeast Asia’s five biggest economies was severe in the second quarter. Indonesia shrank 5.3% year-on-year, Malaysia 17.1%, Philippines 16.5%, Singapore 13.3% and Thailand 12.2%, data compiled by Bloomberg show. Vietnam, which was among the few trade-war winners, will see its three-decade economic ascent grind to a near halt this year. Contractions could persist through early next year.” That’s signalling a prolonged financial squeeze for Southeast Asians.

National Sample Survey Organization (NSSO) recently published a very interesting report. The report highlights how an average Indian uses his time. Based on a survey conducted between January and December 2019, the report describes how Indian household uses their time especially on unpaid caregiving activities, volunteer work, unpaid domestic service producing activities of the household members, learning, socializing, leisure activities, self-care activities, etc.

The key finding of the survey (conducted for persons aged 6yrs and above) could be listed as follows:

Engagement of people in various activities

·         The percentage of women engaged in employment and related activities is very low (18.4%) as compared to male (57.3%). The percentage of rural women in employment is higher (19.2%) than the urban women (16.7%).

·         More rural women (25%) produce goods for own use than the urban women (8.3%).

·         About 81% women provide unpaid domestic services for household members. This ratio is almost similar for rural (82.1%) and urban (79.2%) women.

·         The culture of volunteering for social work is very poor in the country. Only 2.4% people were found to be engaged in unpaid volunteer, trainee and other unpaid work. The rtio is very similar for rural and urban population; and also for male and female members.

·         Only 21.9% of people are found to be engaged in any learning activity. This is worrisome for a young country who aspires to be technology leader of the world.

·         Over 91% people engage in socializing, community participation and religious practices. About 87% people engage in cultural activities, leisure, mass media and sports activities. The proportion of people engaged in these activities is similar in rural and urban areas; and also for male and female members. This explains the poor productivity, massive disguised unemployment & underemployment. It must be a cause of worry for the policy makers; but a strong indications for the corporate planner trying to sell goods and services to these people.

Time spent on various activities

·         On average Indian household spend 11.4% of their time on employment and related activities. For male this ratio is 18.3% while for female it is just 4.2%.

·         About 9% of time is spent on unpaid domestic services. Male members spend just 1.7% of their time on unpaid domestic services, while for women this ratio is 16.9%.

·         A miniscule 0.1% of time is spent on volunteer work.

·         Indian household in rural and urban areas spend less than 7% of their time on learning; while almost 19% time is spent on socializing, leisure, mass media and religious practices etc.

·         Over 50% time is spent on “self-care and maintenance” activities. For a lower income country like India this sounds rather ostentatious.

 As per the latest survey conducted by RBI, the Consumer Confidence in India remained at an all-time low level in September with the general economic situation worsening during the month. This data read with the dismal IIP growth (-8%) and elevated consumer inflation (7.34% highest since January 2020) indicates that (i) the recovery from lockdown is slower and belies the enthusiasm shown by some of the analysts and economists; and (ii) we shall struggle to reach the pre lockdown level of economic activity for at least 2 more quarters and any improvement in the growth trajectory normalized for lockdown impact may still be far away. Remember, the economic growth in India was declining much before the pandemic forced a complete lockdown in March 2020.

The key highlights of the Consumer Confidence Survey (September 2020) are as follows:

·         As per the survey, the consumer confidence (current situation) continued to slip for third successive month and is presently at all time low. Presently, the respondents perceive further worsening in general economic situation and employment scenario during the last one year. Though some improvement is expected a year later.

·         21% respondents reported curtailment in overall spending during the past one year, when compared with the last survey round. While 59.8% reported cut in non-essential spending.

·         Even though consumers expect improvements in general economic situation, employment conditions and income scenario during the coming year; the discretionary spending is however expected to remain low in the near future.

·         Households’ median inflation expectations remained elevated for both three months and one year ahead periods.

83% households reported rise in cost of living. 75.9% expect cost of living to rise further in next 12 months.

An astounding 81.7% household reported worsening of employment expectations in past one year. Though, 54.1% respondents hope that the employment conditions will improve in next one year. A significant 36.1% of respondents believe the employment conditions will worsen in next 12 months.

·         62.7% household indicated lower income in past one year; while only 8.9% reported higher income. 53.2% household expect income to rise in next one year, while 10% expect it to decrease further. Overall, 79.6% respondents felt that general economic conditions have worsened in past one year; while 34.8% respondents continue to believe that the conditions will worsen further in next 12 months. Only about 50% respondents believe the conditions to improve in next 12 months

A web series on the infamous Harshad Mehta scam of early 1990s seems to have triggered a debate on the present state of the financial regulation and risk management practices in India. The key point of interest is whether a scam similar to Harshad Mehta scam could recur!

During late 1989-1992, a Mumbai (then Bombay) based stock broker Harshad Mehta used the inefficiency and lacunae in the banking and stock market systems to create massive pseudo credit. The credit so created was used to manipulate stocks prices, causing the first major bubble in Indian stock markets. This was the time when Indian economy was struggling with unprecedented balance of payment crisis, political uncertainty and higher energy prices due to war between Iraq and US (an ally of Kuwait) in the Persian gulf. Given the despondent economic situation huge short positions were built by traders in Indian equities. In the summer of 1991 the Congress government led by P. V. Narsimha Rao assumed office and unleashed a slew of radical reforms. Using this pretext, Harshad Mehta squeezed the short sellers by using the pseudo credit he could manage by defrauding the nationalized banks. The bubble finally burst in April 1992 when the modus operandi of Harshad Mehta was exposed.

The immediate fall out the bubble burst were (i) promulgation of the Securities and Exchange Board of India (SEBI) Ordinance 1992 to establish an autonomous regulator for regulation of securities market in India; and (ii) up-gradation and modernization of interbank settlement system of government securities. SEBI immediately issued a slew of rules and regulation to regulate the operations of stocks exchanges and market intermediaries. The first fully electronic stock exchange (OTC Exchange of India) modelled on NASDAQ of US was established in 1992. A National Stock Exchange (NSE) was established in 1994, as a nationwide fully electronic trading platform. Establishment of NSE eventually led to elimination of floor based trading and closure of 27 of the 28 regional stocks exchanges. India thus became the first country in the world to have 100% electronic trading in equities. Later Depositories Act was passed to enable establishment of depositories, dematerialization of securities and settlement of trades in electronic form.

The improvement in trading and settlement systems; tightening of margining norms; tightening of compliance procedures to protect the interests of investors etc. have been a continuous process since then. Each instance of fraud & manipulation, accident, unethical behavior has resulted in some improvement in the regulatory process in past 28 years.

However, the continuous strengthening and tightening of regulatory has not deterred the manipulators, fraudsters, and unethical promoters & intermediaries from indulging in fraud and malpractices. The IPO and plantation companies frauds of 1994-1996, dotcom fraud (Ketan Parekh) of 1999-2001, Sahara public Deposit scam, PACL Chit Fund Scam, LTCG Scam, numerous cases of insider trading and front running by mutual funds and corporate officials, act of impropriety by mutual funds (e.g., Franklin Templeton, Kotak MF, Birla MF) etc kept rocking the market intermittently. In fact it has been a 28yrs long episode of Tom (SEBI) and Jerry (Manipulators) where both are consistently trying to dodge each other. Hence, there is no assurance that a Harshad Mehta like scam will not recur in Indian markets.

The best thing however is that Indian markets have remained amongst the safest in world in past two decades. We were perhaps the only market in India that did not impose any trading restrictions during global financial crisis.

The recent measures taken by SEBI and Stock Exchanges to tighten the margining norms to dissuade excessive speculation have been severely criticized by market participants. However, in my view, COVID-19 has warranted SEBI to consider Negative Commodity price and Act of Gods as White Swans for risk management system for securities market. I therefore expect even further tightening of margining and compliance norms.

After showing some reluctance in the month of September, Nifty has resumed its uptrend and is sprinting rather quickly to regain the Mount 12K. Many global markets are also within reach of their highest levels in the year 2020. There have been numerous factors that have supported the benchmark indices to reclaim most of the ground lost in February –March earlier this year, but in my view, the following five events are particularly noteworthy in Indian context:

1.    The relentless fund raising by the Oil to Consumer behemoth Reliance Industries.

2.    Dramatic changes in the fortunes of healthcare businesses in the wake of the outbreak of COVID-19 pandemic.

3.    Revival in demand for IT services, especially due to dramatic changes in the work and travel practices, M&A deals and global realignment of businesses, markets and states.

4.    Strong liquidity in equity market, as many businessmen and professionals have joined the markets as regular trader due to full or partial lockdown in their respective regular businesses. The spare working capital of many businesses may have found its way in the stock trading.

5.    Poor debt returns, lower interest rates on deposits & small savings, and a number of defaults since IL&FS fiasco in 2018 appears to have motivated many investors to change their asset allocation in favor of equities.

I think to forecast the future direction of the market and assess the sustainability of the up move from lows of March. It would be worthwhile to evaluate how long these factors could continue support the markets.

For the argument that economic recovery and corporate earnings will support the markets from here on, I would like to mention just one example.

The stock price of PVR Limited was Rs1178 at the end of September 2019. In the past twelve months, the company has witnessed total shut down of business for 6 months. For next six months it may not witness more than 50% occupancy and much lesser F&B sales revenue. The company continue to incur one third of its regular operating expenses; the interest expense was little higher than usual. Obviously, the balance sheet position of the company has weakened and may continue to weaken for another year at least. The market celebrated the announcement of opening of cinema halls with stock price rising 15% in two days. The current price is 7% higher than what it was in September 2019, with much weaker fundamentals and strong growth uncertainties.

The recent data on sectoral credit distribution and growth released by RBI discloses some noteworthy trends. These trends are interesting and worrisome at the same time. In particular, the investors may take cognizance of the following trends.

1.    Overall bank credit growth for the month of August 2020 was 6% (yoy). This is the slowest growth in bank credit recorded since October 2017. It is pertinent to note because this slowest rate of growth has happened despite a slew of special credit schemes, lending concessions, and rate cuts announced by the government and RBI since May 2020.

2.    In past 10 years, the services sector has been the top performer for the Indian economy. The share of service sector in GDP is over 55%. Unfortunately, this sector has been hit the hardest by the COVID-19 induced lockdown. The credit growth to this sector has seen the sharpest drop in August. The credit growth to the sector slowed to 8.6% (yoy). NBFCs and commercial Real Estate segments witnessed sharp fall, while the trade credit accelerated by 12.5%, the highest pace since March 2019. This trend shall reflect in the GDP growth for 2QFY21 as well.

3.    In past 3 years, personal loan segment has been one of the key drivers of overall bank credit growth. In post lockdown period this segment has seen consistent decline in credit growth. In August 2020, the growth in this segment declined to 10.6% yoy. The credit card segment has seen the sharpest slowdown in growth during lock down. Whereas the vehicle loan segment saw some acceleration in August 2020 as compared to July 2020.

This trend prima facie sounds counterintuitive. In the period of lockdown and work from home, the use of credit card should have been higher. The record level of online shopping transactions reported by various ecommerce players also does not agree with this trend. The sharp slowdown in this segment could be indicative of (i) banks reducing limits of credit card users as the employment conditions worsened and household stress increased; or (ii) households sharply curtailing their discretionary spending.

The rise in vehicle loan in August with unlock gathering pace, may be indicative of rising preference for personal vehicles over public transport due to COVID-19 infection fears. Unavailability of public transport could also be a key factor. This trend would need to be watched carefully till the public transport become fully operational.

4.    As per HDFC Securities, “Industrial credit growth slowed to 0.5% YoY, from 0.8% YoY in July, led by a reduction in large industrial credit growth. Large industrial credit grew 0.6% YoY, vs. 1.4% in July, but de-grew sharply on a MoM basis (-2% in August, and -2.6% in July). After persistent de-growth, credit for medium industries grew 2.8% YoY. This segment saw strong MoM growth in July and August at 6.6% and 5.3% respectively- indicative of disbursals under the MSME credit guarantee scheme. Within industrial credit, sectors such as textiles, gems and jewellery, glass and glassware and all engineering including electronics saw persistent YoY de-growth. Credit for vehicle, vehicle parts and transport equipment and construction saw accelerating growth. Infra credit growth was flattish, with slowing trends in telecom credit growth.

On a MoM basis, industrial credit de-grew 1.5%, after de-growing 1.9% in July. Naturally, this was led by trends in large industrial credit, which constitutes 83.4% of total industrial credit. Credit to micro and small industries witnessed persistent de-growth at 1.2% YoY. Interestingly, credit to medium industries grew 2.8% YoY, after dipping 3.1% YoY in July. Further, on a MoM basis, credit to medium industries grew 5.3% MoM after growing 6.6% MoM in July. This appears to reflect disbursals under the MSME credit guarantee scheme.”

This trends may belie any claim of broader growth revival in near term.

Some of the readers have found my yesterday’s post (The best place to watch this Opera), unnecessarily alarming and extremely hypothetical. I respect their opinion, though I may not necessarily agree with their comments.

I had faced similar kind of criticism, when I found that a symmetrical fall in the market due to outbreak of pandemic may be unwarranted. I expected that the impact of COVID-19 lockdown over various sectors and businesses may be asymmetric and therefore the precipitous fall in the entire market is a big opportunity to buy the businesses that are likely to be less affected or positively impacted. (Time to Take Big Call) My decision to go tactically overweight on equity did not go well with many readers at that time; though I have no regrets. Moreover, I corrected my tactical equity overweight stance in late August (Preparing for chaos – 4). Presently, I am maintaining my standard asset allocation of 60% Equity; 30% Debt and 10% Cash; and as stated in yesterday’s post I intend to go tactically underweight on my equity allocation and increase cash in the coming months so that I could watch the situation unfold without any lines of worries on forehead and adequate dry powder in my pocket.

Now, coming back to the criticism of me being unnecessarily alarming and extremely hypothetical; I would admit that there may be some points of view from where I may look alarmist or hypothetical. But at the same time there are many other points of view that may show different aspects.

To give an analogy, I see the present situation as one with the battle with a strong enemy. While the battle is continuing and armies from both the sides are deeply engaged; it is essential that pain, wounds, blood, destruction and death are completely overlooked. Bothering about these things may make the soldiers emotionally challenged and weaken their will to fight the enemy.

However, when the battle ends, regardless of the victory or defeat, both the sides will have to face the consequences. The wounds would take time to heal. The soldiers will have to adjust themselves to work without the organs that got amputated. The assets that got destroyed in shelling will have to be reconstructed. Each coffin returning from the battlefield will have to be accounted for and dead would need to be buried. This process is usually excruciatingly painful, prolonged and emotionally devastating.

Presently, we all are fighting a battle with SARS-CoV-2, popularly known as COVID-19 or Corona Virus. In past seven and a half month, the economy has suffered a lot. Remember, Indian economy went into the battle with SARS-CoV-2 with a weaker immune system.

The sub-par growth for past many years had already weakened the economy. The government and RBI had already used a lot of ammunition to fight the economic slowdown. The financial system was struggling with the highly debilitating NPA disease. Numerous small and midsized businesses were already on the verge of collapsing. The corporate earnings growth had been anemic for past one decade. The external trade was not growing due to (i) poor global demand and (ii) intensifying competition from small countries like Bangladesh, Vietnam etc. The employment generation was materially inadequate, when seen in comparison to the accelerated addition to the workforce every year.

The pandemic has materially increased the distress at household as well as business level. The resources of the government are also severely constrained. There is some monetary ammunition left with RBI, but it is not certain whether RBI will be able to save it till the end of the battle with the enemy. Once the battle nears end (vaccine is developed and it begins to reach people), the States may begin to withdraw the relaxations. The coffins will begin to reach home by next summer and will have to be accounted by the financial investors only, as is the case always. I see this scenario from where I am standing. If someone is standing at a different vista point and able to see greener pastures, I envy them and sincerely wish good luck.