Vijay Kumar Gaba: coronavirus

Showing posts with label coronavirus. Show all posts

Wednesday, May 20, 2020

ABCD of workers' migration

A popular saying is that "the true character of a person is often revealed in the times of crisis". The crisis tests intellect, common sense, resolve, grit, emotions, beliefs, etc. of people, besides highlighting their strengths, weaknesses and vulnerabilities. This applies mutatis mutandis to various organizations and systems also.

The present crisis, for example, has highlighted the strong character of the common people of India who are usually financially insecure (poor), less educated (or illiterate), religious (and superstitious), and oppressed. Often derided by the elite as dirty and non-compliant, these people have shown amazing resilience and grit. They have bore the brunt of economic consequences of the disease; faced cruel apathy of the administration & state (and in some cases employers also); have been most vulnerable to fatalities due to COVID-19 infections; and still managed to stay peaceful and non-violent.

Thousands of them received animal like treatment from administration and law enforcement agencies. Millions of them have walked hundreds of miles on highways and rail tracks, in scorching heat with infants, old, infirm and sick family members, sometimes going without food for hours. Some accidents causing death of many migrant workers have been reported on the media. However, many deaths due to heat, starvation, fatigue, infirmities and other curable diseases may go unreported.

The heart rending pictures of their painful journey back home have been widely shared and mourned in media. The rhetoric on TV channels and social media did spur the politicians into action, but unfortunately the action on the ground has been abysmally inadequate and apathetic.

Our team traveled to some highways and towns of UP, one of the largest destination of the migrant workers returning back, to assess the extent of the problems and its socio-economic impacts. I would like to share some key takeaways as follows:

1. It is estimated that more than 10 million migrants may eventually return home to the states like UP, Bihar, Jharkhand, Chhattisgarh, MP, Odisha, West Bengal and Rajasthan. These workers are returning from relatively developed states of Maharashtra, Gujarat, Tamil Nadu, Andhra Pradesh, Karnataka, Punjab, Delhi and Haryana.

It is expected that once the lockdown is lifted fully, significantly larger number of migrant workers may seek to return home. Most of these workers are unskilled or semi skilled; though it may include sizable number of skilled workers also.

2. The central and state governments appear to have completely ignored these workers in their planning for the lockdown. No thought was spared for their survival and sustenance in a prolonged lockdown scenario. This adequately highlights the pseudo feudal structure of our governance system (a key weakness) and absolute mediocrity of our administrative machinery (a key vulnerability). The Chief Minister of UP has emerged as most popular politicians insofar as handling of migrant workers is concerned. Even though he started a little late and is not supported ably by the administration and bureaucracy, he still has managed to convey the message that he cares.

3. The innocent, helpless, scared, hungry and tired migrant workers have been treated worse than animals. Many states have treated them as if they were illegal intruders from some foreign country. This highlights that our economic and governance model may still be colonial in nature.

4. A significant number of migrants on roads we spoke to confided in us that they were planning to return home since past few years, but were not able to muster enough courage. They believe that with so many government schemes operative, two square meals with dignity & freedom is not a problem in villages. They find it better than living in urban slums like insects.

5. After speaking with over 900 migrant workers on road, we can say with some confidence that:

(i) A large number of migrant workers returning home may not easily go back to their previous place of work. Many of them may in fact never leave their homes for work. There could be at least the following five consequences of this trend:

(a) Businesses, especially construction and textile, may be forced to invest more in technology and automation. Household relying on domestic worker may also be forced to invest in home automation for household chores.

(b) Many labor intensive businesses like textile may have to either relocate their manufacturing units in the areas where adequate number of local labor is available.

(c) The pressure on civic infrastructure in large cities and railways may ease. The multibillion rupees remittance industry may be a key loser.

(d) The home states of these workers may be incentivized/forced to invest in industrial infrastructure and seek private investments to create ample employment opportunities close to home. This may be a big fillip to the "self reliant" India mission. Agro processing is one industry that may see exponential investment and growth.

(e) The regional imbalances in India may gradually bridge, if the home states seize this opportunity and develop a good industrial infrastructure.

(ii) The Agony, sense of Betrayal, Confusion and Disillusionment (ABCD) is ideally a fertile ground for emergence of communist movements. Given the democratic communist parties in India are totally marginalized, the fear is that the violent Naxal movement may spread out of the forests of central India. A strong strategic initiative to prevent such eventuality must be taken immediately. The forthcoming election in Bihar may display some reflections of this fear. Watch out for that closely.

(iii) The expectation from, and reliance on, the government's cash, food and fuel provisions shall rise materially, especially in the rural and semi urban areas. The fiscal pressures may remain elevated for many years to come.

(iv) The pressure on civic and social infrastructure of villages and semi rural (or semi urban) areas shall rise significantly. Administration need to gear up for this well in advance, otherwise we may have garbage, filth, and disease everywhere.

(v) The migrant workers returning home after spending many years in large cities are carrying an entirely different culture with them. On the positive side we may see improvement in religious and superstitious practices. However, on the other side, we may see many indulgences creeping in the simple village life style.

Thursday, May 7, 2020

Caught in a quagmire

The jokes & memes on coronavirus are now getting stale. The opening of liquor shops and hike in duty on transportation fuel has provided some new fodder to the meme and joke writers. But the new jokes are more ironical than funny. This clearly indicates that the people are now tired & frustrated to the extent that they are now willing to risk their life to get back to their pre lockdown status.

The government however appears to be caught in a quagmire. It is finding it extremely challenging to strike a balance between (a) the urgent need to augment resources to compensate for the poor revenue collection in past 5 weeks; (b) to provide meaningful stimulus to the businesses facing unprecedented liquidity, solvency and viability crisis; (c) support consumers who have lost income; (d) make concessions for the businesses to attract new investment; (e) restore confidence of people who psyche has been damaged; and (f) continue pursuing its agenda of nationalistic and cultural renaissance.

Three recent events are noteworthy in this context. These events amply highlight the predicament of the government and materially dampen the confidence of investors and entrepreneurs.

(a) A group of senior Indian Revenue Service (IRS) Officers released a report suggesting ways and means to augment resources to compensate for the revenue shortfall and stimulus needs. The government not only contemptuously rejected the suggestions but also initiated punitive action on the concerned IRS officers. However, within a week, the government has decided to steeply hike duties on transportation fuel denying the consumers the benefit of fall in global crude prices. BJP led Haryana government has also raised fees, duties and taxes sale of liquor, petroleum products, and fruits and vegetables.

It is clear that the government is in favor of higher taxation, but is afraid of antagonizing big businesses by imposing higher direct taxes. They have chosen the easier route of indirect taxation, which incidentally will hurt the poor most.

(b) As per some media reports, the government has apparently identified a land pool of 461,589 hectares across the country in a bid to attract Multi-national Companies (MNCs) that will be looking for new sites once they shift their operations out of China. Almost everyone relevant in the central government as well as the governments of BJP ruled states has gone to media, claiming this to be a massive opportunity which the government is determined to seize.

Attracting new investments, aiming for deeper and wider integration into the global supply chain, accelerating industrialization of Indian economy are all noble intentions.

However, it would have been more comforting and believable, if before counting the chickens, the government had clearly specified the learnings from the POSCO, Niyamgiri (Odisha), Hasdeo-Arand (Chhattisgarh), Amravati (Andhra Pradesh), Tata Nano (West Bengal), Bhatta Parsol and Dadri (UP), Mumbai Coastal Road (Maharashtra), Tuticorin (Tamil Nadu), Sardar Sarovar (Gujarat), Tehri (Uttrakhand), Giri Barrage & Spiti Solar project (Himachal Pradesh), several SEZs approved and de-notified since 2000 etc.

People would also like to know how (and if) the government plans to address sustainability concerns before allowing any new major industrial activity. Remember, at this point in time there is absolutely zero margin for error. Any mistake will prove extremely costly, as India will not only miss the massive opportunity, but also lose credibility for future investments.

(c) The decision to allow the states to open of liquor shops to ease the fiscal pressures, despite poor experience of handling the issue of migrant laborers' return to their native place, and consequent chaos at liquor shops across the country, highlights two things: (a) there is little coordination and/or willingness to cooperate between the center and non BJP ruled state governments.

Besides, the management of lockdown is popularly believed to be lacking. Besides economists, many scientists and medical experts have raised question marks on the necessity and desirability of total lockdown in Indian context.

The unpredictability of the current regime, as demonstrated by decisions like Demonetization, strikes on Pakistan, and total lockdown, has perturbed the both the investors and the entrepreneurs.

(I will continue with Investment Strategy series tomorrow)

Tuesday, May 5, 2020

Investment Strategy - 1

Last week, I had shared latest update relating to my investment strategy. I had highlighted that we may be standing at the threshold of a new economic and market cycle. The global economics, politics and markets may change rather dramatically in next couple of years, in the aftermath of the current crisis. I have therefore decided to reorient my investment portfolio to suit what I believe could be the shape of the new world. (see here)

Many readers have expressed surprise on my decision to (a) raise the weight of equities in my asset allocation; especially at this point in time when almost everything appears uncertain and future is shrouded in thick black clouds; and (b) prefer Neutral currencies like Cryptos over USD and Gold. I would like to address the inquisitions of the readers as follows.

It is pertinent to note that I have been expecting a paradigm shift in the global markets for past 5 years now (for example see here). Especially in past 5 years there have been many indications pointing to the shift taking place, though at a subtle pace.

Sino-US tariff conflict; virtual dismantling of SAARC, launch of ambitious Chinese projects like Chine Pakistan Economic Corridor (CPCE) and One Belt One Road (OBOR), Exit of United Kingdom from common European Market (EU); negotiations over new economic blocks like Regional Comprehensive Economic Partnership (RCEP) & Trans-Pacific Partnership (TPP) agreement, US-EU trade renegotiations; US-Japan trade conflict; Indo-US trade conflicts; Indo-Arab realignment; enhanced Indo-Japan trade relationship; decision of US to completely exit Afghanistan; fissure in the cartel of large oil producers (OPEC+), and strong reemergence of socialism in the developed world are some of the indicators pointing towards the shifting paradigm.

When I say that the paradigm is shifting in global markets, I am certainly not suggesting "it is different this time". What I am essentially saying is that "it is the same as always".

I have also written this couple of times before (see here), the global market paradigms have shifted every few decades. The shifts have been caused by a variety of factors. Sometimes it has been led by shift in strategic and geo-political power (spread of European empires in 17-18th centuries and strength of US post WWII). Sometimes technology innovation (industrial revolution in Europe and US, post-war Japanese manufacturing renaissance and then internet revolution in US) caused the shift. Rise of oil economies post 1970's in middle east Asia and Chinese and Korean manufacturing revolutions have also caused material shift in global markets. Nature has also played vital role in causing tectonic shifts in global power equations and market balances. Decline of great Roman empire is case for study.

In most of these market transition phases, currencies have played a key role. Therefore it is pertinent to evaluate the current transition in global market paradigm from this angle also. In most earlier instances the emerging currency (including gold and silver in earlier instances) has changed its relative global value during the course of the shift. Sometimes strength in the currency or gold & silver stock played a critical role, as in case of British and Portuguese dominance in earlier centuries. In some cases weakness in currency supported the shift, as in case of the rise of Korean and Chinese manufacturers causing decline of Japanese dominance.

The present case appears no different - Chinese are trying to establish their supremacy in global technology, economic and political affairs by becoming a primary challenger to the US hegemony; Japanese are trying to regain their lost market share in global manufactured goods market by depreciating their currency; Germans are struggling to retain their market share by forcing the Euro down; and EMs like India are trying to establish a foothold in the global markets.

US have so far been successful in reigning its currency without compromising the supremacy of dollar. But this situation may not last longer. ....to continue tomorrow

Thursday, April 9, 2020

Some random thoughts Post COVID-19 world + Part 2

The outbreak of COVID-19 pandemic has shaken the collective consciousness of the global community. Since WWII there have been many crises that have impacted more than region of the world. But this novel coronavirus is perhaps the most widespread and deep crisis that the humanity has faced in past 75years. The global financial crisis (GFC) of 2008-09 had impacted most global markets, but the impact on human life was not this serious.

This crisis has occurred at a time when the global order was resetting itself in the aftermath of the GFC. The central bankers were finding the ways to exit the unsustainable monetary policies adopted to mitigate the impact of GFC. The global trade imbalances that have persisted for almost 3 decades were correcting as China, US, EU, Japan, Russia, OPEC etc were actively engaged in aggressive trade (re)negotiations. Old trade and geopolitical blocks were weakening and new blocks were being formed. China had accelerated the drive to assume global leadership through mega initiatives like One Belt One Road (OBOR) and China Pakistan Economic Corridor. UK exiting the common European Market weakened the Europe to some extent. US tightened immigration rules, decided to withdraw from conflict zones like Afghanistan, Iraq, Libya and refused to engage in Syria signaling a paradigm shift in its policy towards globalization and, free trade.

The outbreak of novel coronavirus has however significantly changed the course of reset, in my view. I feel the following are some of the issues that may define the contours of the new order in post COVID-19 world.

1. The China may be regarded as an irresponsible power, and may not be accepted as a major global leader. In particular, the mistrust between US and China may increase manifolds. We may likely see a Sino-China cold war that may last for many years, or may be decades.

2. The vulnerabilities of US and Europe have been exposed by the coronavirus.

Post 9/11 incidence, we saw dramatic changes in the concept of internal security in US and many other countries. The suspects were shot dead without much provocation, disregarding all concerns for human rights and liberties. The culprits were chased and killed in foreign jurisdictions often disregarding sovereignty of these foreign lands. The diplomats, politicians and prominent personalities arriving in US and UK were strip searched and denied entry with impunity.

We shall see further rise in xenophobic tendencies of the developed western countries. Another major impact could be concerted effort to reverse the course of demography, especially in European countries that are turning old at an alarming rate. This could be achieved by substantial incentives for procreating aggressively or changes in the immigration policies to encourage let young professionals from developing countries settle there.

3. I do not believe that post COVID-19 world would be highly localized, nationalist and protectionist. Nonetheless, it is entirely possible that new trade and geopolitical blocks get formed. The new blocks thus formed will define the contours of new world order.

4. The global supply chain presently relies heavily on China for components as well as manufacturing services. Many developed countries get their fiscal gaps filled by China in lieu of using Chinese manufacturing services and allowing China access to their markets.

The new world order may see a massive shift in this trend. Countries may seek to limit their fiscal deficits and seek diversification of their supply chains. This will present many opportunities & threats to the emerging economies like India.

5. The dominance of USD as world's only reserve currency will face serious challenges from more neutral digital currencies.

6. The ideas like free trade, personal liberties, etc face serious challenges from the rising tendencies of government world over to exercise enhanced surveillance and control over personal conduct and data.

7. The business models, valuation models, risk assessment techniques, commercial contracts etc shall get redefined to build in probability of prolonged shut downs.

8. The foreign travel protocols may include vaccination as a pre requisite.

9. The business continuity planning may become a mainstream subject for all businesses, not just the mission critical processes and financial services.

10. A massive tsunami of debt defaults/waiver may hit the global financial system. Handling of this tsunami and subsequent recapitalization of the lenders will be a key challenge for the governments and central banks.

Inappropriate handling of this challenge may eventually lead to shortage of growth capital and thus rise in cost of capital. A sharp down leg of deflation could lay the foundation of an inflationary world for next decade or so.

Where India stands in this transition and what are the opportunities and threats?

I shall share my thoughts on this next week.

Wednesday, April 8, 2020

Some random thoughts Post COVID-19 world

Little more than a decade ago, a global financial crisis engulfed the global markets. The impact of the crisis on financial markets was mitigated in couple of years by collective efforts of the governments and central bankers. However, the social, geo political and economic impacts of the crisis largely remain unmitigated.

The "Reset" button pressed by the crisis has resulted in widening of socio-economic divide across the world. The geo political tensions have intensified materially. The rise in protectionism has adversely impacted the global trade. The rising unemployment in Europe and most commodity dependent economies in Asia, Africa and Latin America, declining growth in China, substantial cut in developmental aid to least developed nations due to fiscal pressures, has caused widespread human suffering for over a decade now.

The onslaught of novel coronavirus (COVID-19), in my view, will accelerate the "Reset" process leading to a new global order in next 5 years. But for COVID-19, the process might have taken 10-15 years.

I have written this before, but it would be in order to reiterate a brief account of the changes in world order that have taken place since advent of 20th century.

In 1917, Russian revolution successfully dismantled the Tsarist autocracy and laid the foundation of USSR. In the following decades, many smaller independent European states became subservient to a mighty Russian socialist army, and together formed one pole in the emerging bi-polar world, forever shrouded by the specter of cold war.

In the same year, USA decided to join the War as an associate of the Allies - a development that tilted the scale in favor of the Allies, bringing the War to an end in 1918. In the following decades, USA evolved into a formidable military and economic power that lead the democratic allies to become the second pole in the emerging bi-polar world.

The imperialist global order that existed in preceding centuries began to dismantle. Many colonies of European empires gained freedom. The British Empire that was built in three centuries and covered almost one fourth of the world population and area before the War, was completely dismantle in the following three decades.

It took three decades for the new order to consolidate. The new order was characterized by UN, NATO, WARSAW, Mao, Israel, NAM, Bretton Woods, World Bank, Cold War, energy cartel (OPEC), et. al. The globalization that was a norm prior to the first War was completely overpowered by the forces of nationalism and protectionism.

The post WWII order lasted till the German Wall fell and USSR disintegrated in early 1990s. This unleashed a new wave of globalization. Global Trade (WTO), Internet, dematerialization of assets, Europe integration into a single market, China's entry into mainstream global trade (through WTO), free flow of capital, G-20, BRICS, numerous FTAs, global war on Islamic fundamentalism, energy security, climate control and global financial crisis, dominated this phase.

After three decades, we are on the threshold for a fresh reset in the global order. I do not subscribe to the ideas that the process of globalization is reversible. I am therefore not anticipating that the emerging world order will be based on localization of trade and closed borders.

Tomorrow, I shall share my thoughts on the likely shape of the emerging global order and likely opportunities in post COVID-19 induced lockdown world.

Friday, March 27, 2020

COVID-19 impact on economy

Most brokerages and rating agencies have highlighted the severe impact of the 21 days total lock down announced by the Government of India. For example consider the following:

1. JP Morgan estimates that the lock down will significantly impact 60% of GDP, though the post lock down rebound could be equally sharp. There will some permanent loss, depending on the length of the lock down. It expects global economy to enter into recession in H1'20, and since the India is fiscally constrained, the recovery will mostly depend upon the monetary easing and regulatory forbearance for stressed debt.

2. Deutsche Bank feels that the total lock down has pushed India into uncharted territory. We may see an unprecedented negative GDP growth print in 4QFY20 and/or 1QFY21. The government must announce a coordinated & front-loaded fiscal/monetary stimulus to mitigate the impact of lock down.

3. Jefferies highlights that the total lockdown shall significantly hit the near-term growth. However, there is a probability of a V-shaped recovery post lock down. Fiscal support for the affected workers/business can drive faster recovery. A double digit EPS decline in 4QFY20 may already be in the price.

4. The initial estimates of Nomura suggest that ~75% of the economy will be shutdown, resulting in a direct output loss of ~4.5%. Additionally, there will be indirect effects such as the persistence of public fear factor (even after the lockdown ends), a high risk that the livelihoods of the predominantly unorganised workforce will be hit and a sharp increase in corporate and banking sector stress, which are likely to further weigh on growth is beyond Q2 in H2 2020. It expects the central government to soon announce a stimulus package of ~0.7-1.1% of GDP. Along with the growth hit and poor tax collections, we expect the fiscal deficit for FY21 (year ending March 2021) to balloon by over 1% of GDP from the 3.5% target set in the budget (i.e. more than the escape clause leeway of 0.5% of GDP). Noumra feels that the monetary policy proactiveness has been missing so far; nonetheless it expects at least 50bp of policy easing on or before the 3 April policy meeting, accompanied by a host of liquidity injections and unconventional policy measures to reduce financial sector tightness, including large scale open market operations.

5. ING believes that the three-week nationwide lockdown will significantly dent India’s GDP growth, making this an even worse year for the economy than the 2008 Global financial crisis. This demands a stronger policy response. Until then, the looming economic misery is poised to push USD/INR above 80 in the coming days. As per ING The biggest whammy will be to private consumption, which accounts for 57% of India's GDP. With all non-essential consumption dropping virtually to zero for a week in the current quarter means year-on-year GDP growth plunges to just about 1%, and with two weeks of a hit in the next quarter could push it to about -5%. We would anticipate at least one more quarter of drag keeping growth in negative territory, beyond which the policy support and favourable base effects should drive recovery back to positive growth. While this shaves a full percentage point from the yearly growth in the current fiscal year (ends on 31 March 2020) to our estimated 4.0%, we have revised our forecast for the next financial year to 0.5% from 4.8%. This is a far cry from the government’s expectation of over 6% growth outlined in the FY2020-21 budget, which will surely be scaled back significantly as the Finance Ministry prepares fresh stimulus to stem the crisis. However, citing significant policy support, the official growth outlook may not be as bearish as ours, though we note that official growth tends to be overestimated by about 2%.

6. EMKAY Stock Broker feels many industries/SMEs will be running on zero revenues for close to a month and 'opening up’ after the lock down is likely to be measured. It expects permanent impact of 21 day shutdown even into the longer term numbers, anticipating that the shutdown could push unorganised sector to the brink.

Most other brokerages and rating agencies have expressed similar views and opinions. Both the macroeconomic growth forecast and earnings estimates have been materially moderated.

In my view, it is tough to estimate the actual outcome. The real picture could be very different from what we are anticipating today. For example consider the following:

(i) The lock down condition (total or partial) may continue for longer.

(ii) The bad weather has damaged some Rabi crop in North India. Shortage of labor for harvesting and transportation of crop to Mandi could cause some further damage. This will add to the poor data.

(iii) The nationwide protests against the Citizenship Amendment Law during December-February, had resulted in some serious disruptions, especially in North and east India. None of the forecasters seem to be accounting for that.

(iv) There were many industries, like automobile, who were struggling with high inventory and/or losses. This lock down could actually be a blessing in disguise for such businesses.

(v) Under the pretext of the lockdown, many financial institutions may be allowed to offer concession to the stressed borrowers. This could work either way - it may increase the NPA levels, or it may rationalize the provisioning and IBC proceedings, and actually help both the lenders and borrowers.

(vi) The government may get a reprieve from global rating agencies for indulging into some fiscal profligacy. This can actually help kick start the economy.

(vii) The global supply chain will definitely see a shift from China to other countries. If the government plays its cards right, the elusive capex cycle can start much earlier in India then currently anticipated.

Friday, March 13, 2020

Some random thoughts of coronavirus

An old market proverb is that "markets stop panicking when the government begins to panic". However, the current market conditions appear defying this conventional wisdom. Instead, the panic shown by the government authorities in dealing with the threat posed by the novel coronavirus (COVID-19) has caused deeper panic in the financial markets.

From the statements made and actions taken by various state authorities across the world (including India) to check the spread of the coronavirus, I decipher the following:

(a) The coronavirus has spread to a large number of countries. Even though the mortality rate of patients suffering from the virus may not be high, the transmission is much faster, and it threatens large scale immobility or people and disruption of business. In that sense it is perhaps one of the most disruptive pandemic for the modern generation. The spread of bubonic plague in 19th century (though that had massively higher mortality rate) could be the only appropriate parallel to this.

To this extent, the panic reactions of the government may not be unwarranted or inappropriate. Though many may like to argue that complete ban on travel could have been avoided by comprehensive screening mechanism at the ports of departure as well as the port of entry.

(b) The indications from China is that the Chinese authorities are in full control and new cases of infection are negligible now. The businesses have started the process of normalization and in 4-6 weeks shipments could return to normal level.

Similar, indications have been received from South Korea, Hong Kong, Singapore, Vietnam, Taiwan, Thailand and Malaysia etc.

The number of cases in heavily populated South Asia (India, Bangladesh, and Indonesia) is also well within control.

Regardless of the alarm bells sounded by German Chancellor, WHO, and European Commissioner, the coronavirus may be declared under control latest by the end of April.

(c) The disruption is likely to have significant impact on shipping, travel and hospitality industries. The loss of business for them in this quarter may be permanent in the nature.

(d) So far there is little indication that the spread of coronavirus may have impacted the household income significantly. The impact on household consumption may not be material, or at least not permanent. At worst, we may see some deferment of the demand till the conditions normalize.

(e) As of this point in time, there is little indication that the disruption may cause any significant change in the business practices and procedures. Redefining necessary travel, work from home, virtual meetings, etc are some trends that may not be materially stimulated by the coronavirus. I expect these trends to follow their normal trajectory.

(f) The business disruptions caused by the coronavirus related developments, could prove to be fatal for many micro businesses as well as many large businesses. For example, a small eating joint may default on its debt repayment obligation and face closure. Similarly, many large businesses which are already stressed may breach the fault line and become defaulters. Financial sector will have to deal with this. The role of regulator would be critical in managing this situation. They must proactively allow the banks to assess which accounts to allow relaxation and to which not.

At this point in time, I see no reason to change my investment strategy as discussed couple of weeks of ago (see here). I shall continue to shift my debt and gold overweight to equities over next 3 weeks.

Wednesday, February 26, 2020

COVID 19 - Strategy review

After initial round of denial and complacency, the global markets seems to be waking up to the grave threat that the spread of coronavirus poses to the global economy and therefore global markets.

As more foreigners emerge out of China mainland, the information opaqueness is diminishing insofar as the official Chinese claims and the popular perception of the spread of virus is concerned. It appears that the impact of virus far more serious initially estimated by global community or communicated by Chinese officials.

In past two weeks the reports have suggested that the coronavirus has invaded many more territories across Asia and Europe. Japan and South East Asia Countries appear to be worst impacted. Japan and South Korea have raised the threat alert level to the highest that allows the government to lock down cities and businesses. Italy has also reportedly shut down schools and crowded market places and stadiums till further notice.

WHO has feared that the virus could be a potential endemic that may impact millions of people. Even the Chinese premier Xi issued a stern warning to a gethering of over 170,000 government and ruling party officials -- the biggest of its kind saying, that the outbreak danger near the heart of the government.

As per a latest research report published by Bank of America, suggests that the US economy may be very close to the tipping point for slipping into a recession. As per the analysis at the popular ZeroHedge blog, "After more than a month of shocking complacency (because what, central banks will somehow print antibodies and "fix" the covid pandemic which will restore collapsing global supply chains?) traders are "suddenly" realizing that the coronavirus outbreak contains a significant likelihood of impact to the global economy and the potential to become a black bat, pardon, black swan type event. An event which could quickly spiral into a US - and global - recession."

IMF has also cautioned the global community that "coronavirus epidemic could put an already fragile global economy recovery at risk. In a statement made at G-20 meet, IMF chief Kristalina Georgieva said "Global growth was poised for a modest rebound to 3.3 percent this year, up from 2.9 percent last year. However, the COVID-19 virus -- a global health emergency -- has disrupted economic activity in China and could put the recovery at risk.

The global markets are obviously nervous. The investors are rushing to take shelter in the safe haven precious metals, USD and bonds. The risk assets - equities, emerging markets, and commodities are selling hard.

Indian markets have witnessed sharp correction accompanied with rise in implied volatility. With the result season over, budget digested and medium term credit policy in place, the market lacks much motivation to resist the selling pressure emanating from global nervousness. Moreover, we are entering the season when traditionally liquidity tightens due to year end settlement demand, harvesting and advance tax payments. Traditionally, in many parts of India, the fortnight before the festival of Holi is considered inauspicious for buying new things, marriages and other functions.

Under the circumstances, it would be reasonable to assume that the weakness in the markets may persist for little longer than most would have assumed.

The question many readers are asking, whether this fall is an opportunity to avail, an occasion to sit tight and wait for the tide to pass over, or a trigger to sell and run away.

Though it is too early, but still I would like to review my investment strategy in order to find answers to these queries.....to continue tomorrow