For past one month, I have been struggling to suitably modify my
investment strategy to factor in three things:
1. Narrow physical global
borders and wider and more liberal and freer international information highways.
2. Zero cash flows for
businesses for a protracted period. This factor used to be an integral part of
equity valuation during the days of strong trade unions in 1960s to 1980s.
3. Potential new
leadership that will drive the markets in 2020s.
During my quest, I remembered an event from my childhood, when
we used to live in Agra town of UP. It was summer of 1979, when suddenly one
day one of my uncles came to our house and announced that he will take everyone
in the family to show the latest Bollywood blockbuster Gol Maal. Those
were the days when children were least interested in indoor things like Cinema
and TV. To lure the children, the uncle promised a grand treat post movie show.
Everyone in the family was highly surprised by the proposal, because
the Uncle was known to be miser. Usually he would not spend a paisa to
entertain any one, even his own children. When asked he explained that
"Skylab" is going to destroy the earth tomorrow and no one shall
survive. So it is last chance to enjoy the accumulated wealth. (Skylab was
USA's first space station that went astray and turned into ashes on hitting the
earth's orbit over Indian ocean). Later we learned that the Uncle was not alone
in his celebrations of the final day. There were many others like him in Agra
and nearby villages who did strange things to spend their accumulated wealth.
Many prepaid their loans, as they did not want to die in debt, lest they would
have to repay in their next birth!
Contrasted with Skylab, COVID-19 is much stronger and wider a
fear. People across the world are fearful for their lives. The more educated,
informed and rich a person is, the more fearful and pessimistic he/she is
sounding. But instead of splurging their wealth, people have become
spendthrift. They are not only holding their discretionary consumption back,
but also promising to themselves to save more in future. This is true, not only
for New York, San Fransisco, Paris, London, Rome, Amsterdam, Barcelona,
Singapore, but equally for Agra, Patna, Jodhpur, Mehsana, Kota, Vijaywada,
Jammu, Kashipur, Bareilly, Jabalpur, Mumbai and Delhi.
Believing that lockdown is certainly penting up demand for
discretionary consumption might be a mistake in my view. The investors need to
also evaluate the alternative scenario where the lock down is giving space and
time to consumer to have a complete rethink on their consumption behavior and
decide against discretionary consumption.
While reading and analyzing the current situation for the
purposes of suitably modifying the investment strategy, I am getting a lot of
mixed feedback. I am finding it little hard to read this jumbled puzzle, with
many pieces still missing. The following examples of mixed signals will make it
more clear what I am trying to say.
1. Employment paradox:
I spoke to a restaurant owner and a civil contractor. They informed that most
of their labor has gone back to their respective native places. Many of the
remaining are also looking to go back and may not stay back once the lock down
ends. They feel that they will have to struggle hard to get new trained labor,
and may have to even pay much higher wages as compared to what they were paying
in pre COVID-19 era.
I also spoke to many young professionals who shall be completing
their courses this summer. Many of them have already secured jobs at campus
placements. Almost all of them are worried whether the companies will honor the
job offers and if not, whether they can get new jobs in next six months. They
fully realize that in any case the average salary they will get is going to be
much lower than what they could have expected in pre COVID-19 era.
Some of my friends and acquaintances, who are mostly senior
professionals and working from homes are not confident whether their jobs will
stay once the lock down ends and senior managements make an assessment of
potential redundancies.
2. Automation needs:
Some of the businessmen I spoke to have highlighted that they have learned a
key lesson from the lockdown, viz., they must invest in automation of the
business. In future they should be able to work from home seamlessly, if a need
arises. They want the processes to be automated and flexible. Even my wife and
many of her friends are indicating at automating the household chores like
dishwashing and cleaning. They do not want to rely on temporary domestic
servants. Besides, they are fearful of an outsider coming to their home daily.
At the same time, some of the farmers have indicated that lot of
people who have come back to villages may not return to cities in a hurry.
There would be plenty of trained labor available in the villages. Therefore,
they may defer their plans to invest in larger agricultural equipments like
thrasher, cultivator etc.
3. Demand supply
inequilibrium: Factors like poor employment conditions, flat to
negative wage growth, tendency to consume less due to fear and uncertainty etc
indicate that we may see a wider and deeper demand contraction in the economy,
which was not doing great even in pre COVID-19 world.
At the same time, my sources in villages and agri trade indicate
that (i) the weather have been quite unusual in February and March. Heavy
rains, hailstorms, dust storms etc have caused damaged to Rabi crops as well as
fruits like Mango. Shortages of labor for harvesting and due to lockdown, and
logistics constraints in selling the crop have worsened the situation.
The worst part is that many cold stores could not be vacated to
store the new crop. Crops like peas and potatoes stored in winters are
occupying significant storage capacity. In many cases, the value of the stored
produce is now lower than the accumulated rent. The store owner will have no
option but to either destroy the produce or dispose it at distress value to
make space for the fresh produce.
All this indicates heavy bouts of cyclical food inflation later
in the year and next year. Besides, higher state demand for food to feed the
poor, will also add to demand supply inequilibrium later in the year.
4. Peacock vs
rodents: Almost all of my friends and acquaintances have celebrated the
sighting of peacocks, sparrows, deer, dolphins and enchanting flowers as the
people have vacated space to nature. One month of lockdown and slower activity
has made it sure that the damage to the nature is far from the point of no
return and we can still undo the damage already done to the nature.
At the same time, my office boy who lives in the office is
telling me that the population of rodents and insects in office has increased
manifold. These have damaged the electric wiring, electronic equipments like
computers, printers and air conditioner; office files etc. One of my friends
who owns a clothes shop has also narrated similar stories to me. After the lock
down ends, I would need to spend at least one month on repair and disinfection
of my office, at significant cost.
5. Socialism vs
liberalism: The lock down has threatened to relegate millions of people
back to the BPL status. There is real threat that the poverty alleviation
efforts made in past 3 decades may be largely undone by this. The wealth and
income inequality shall definitely to new highs.
It will therefore be a great challenge for the government to
create balance between the urgent need to support the poor &
underprivileged and help the large corporate in availing the once in a century opportunity
and make India a manufacturing hub for the world looking for alternative
destinations away from China.
The political instinct would be to raise effective taxation
(COVID cess etc.) and increase cash subsidy for the poor. However, the
opportunity will demand liberal and competitive tax and regulatory regime for
the large businesses.
The government would need to choose from pragmatic liberalism or
crony socialism.
5. Health
consciousness vs disease management: The social media posts on my
timeline indicate that most people have taken up to a healthier lifestyle. They
are exercising, doing household chores themselves, eating healthy food and
observing highest standards of personal and social hygiene.
However, in personal conversations I have discovered that a
month of work from home has resulted in higher number of cases of elevated
levels of blood sugar, hypertension, depression, arthritis, etc.
What will drive the future consumption behavior - health
consciousness or disease management is something that only time can tell.
6. Humanity or
hatred: My social media time lines are also full of the stories about
acts of humanity. Many people have donated money; many are providing food and
clothes to the poor; many are teaching students who are unable to attend Zoom
classes; health workers and policemen walking that extra mile to save people
lives etc.
However, at the same time the venom being spewed in media and
personal conversations against other communities and religions is
unprecedented. I have not witnessed this kind of communal hatred and enmity
even during worst of the many communal riots in the country or during the war
with neighboring countries.
What will be the driver of social engine in post lockdown world
- the humanity or hatred will also be told by the time. If the humanity wins
the driving assignment, we should be galloping forward in our development
endeavor. However, if hatred displaces the humanity, we may return to base
1947.
...to continue tomorrow
