Vijay Kumar Gaba

UK has allowed the administration of vaccine for SARS-CoV-2 virus (commonly known as Covid-19) developed by Pfizer. Russia and Chinese authorities have also confirmed approval of separate vaccines. In India also couple of developers has expressed confidence that an effective vaccine will soon be available for Indian population.

This is certainly a matter of relief for the distressed mankind living in fear since outbreak of the pandemic. However, for the investors in stock markets wider availability of vaccine could be a matter of slight concern.

So far the investors in equity have had a decent run in 2020, regardless of the severe correction in the early days of the pandemic. In my view, a large part of the price gains in equity stocks could be attributed to the accommodative monetary policy adopted by the central bankers world over.

In past 9 months, a significant part of the cheap and abundant money may have actually flown to the financial assets (mostly equities) as (i) the requirement of money in real businesses have been less; and (ii) the interest rates have persisted at lower levels making it un-remunerative for investors to keep money in short term debt or deposits.

The rising certainty about vaccine availability and subsequent normalization of the accommodative monetary policies may rock the stock market party in 2021. It may be pertinent to recall the impact of taper tantrums on stock markets in 2013, when Fed started to wind up the QE used for supporting and stimulating the economy in the aftermath of global financial crisis in 2008-09.

In a 2017 study, Anusha Chari and others (National Bureau of Economic Research, Cambridge, see here), examined the impact of monetary policy surprises extracted around FOMC meetings on capital flows from the United States to a range of emerging markets. The study revealed “substantial heterogeneity in the monetary policy shock implications for flows versus asset prices, across asset classes, and during across the various policy periods.”, as per the study—

“The most robust finding is that the evolution in overall emerging market debt and equity positions between various policy sub-periods 14 Not reported but available from the authors. 33 appear to be largely driven by U.S. monetary policy induced valuation changes. In nearly every specification, the effect of monetary policy shocks on asset values is larger than that for physical capital flows.

Further, there is an order-of-magnitude difference between the effects of monetary policy on all types of emerging-market portfolio flows between pre-crisis conventional monetary policy period, the QE period and the subsequent tapering period. We detect some significant effects of monetary policy on flows and valuations during the period of unconventional monetary policy (QE). However, the effects are not consistent over all dependent variables. In contrast, during the period following the first mentioning of policy tapering, we uncover a consistent and large effect of monetary policy shocks on nearly all variables of interest.”

Normalization of global trade to pre pandemic levels may essentially obliterate the supply chain bottlenecks and ease commodity inflation. Remember, the pandemic has not caused any physical destruction, as is usually the case with a larger war. Therefore, normalization would not require any major reconstruction or rebuilding endeavor. The damage is mostly to the personal finances and small businesses. This will keep hurting the demand growth for few years and keep the need for additional capacity building low. The new capacities would all be built in healthcare and digital space, not much in the physical space.

In Indian context, in past six months, the yield curve has steepened the most in past two decades at least.

As per media reports, many private companies are able to raise 3month money at 3-3.3%, a rate lower than the policy reverse repo rate as well the corresponding bank fixed deposit rate. Obviously this is an anomalous situation and may not sustain for long.

There is little doubt in my mind that any further steepening of the curve could fuel Nifty to the realm of 15000 in no time. But I have serious doubts whether in a fast normalizing economy, as claimed by various government officials, economists and other experts, the short yields may continue to soften, or even sustain at the current level, especially when the inflation is seen bottoming at or above the RBI target rate.

Any sign of “withdrawal” might shock the brave traders, who are assuming unabated flow of cheap money. Beware!

 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.

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.