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Nationwide Lockdown Extended
A classic catch-22 situation to persist
India Economy will remain under the lockdown till 3rd May as both Central and State Governments favour extending prohibitory measures to contain spread of virus. However, some relaxation may be given in the areas free of any case of COVID19 post 20th April. Blanket extension will keep the investor on edge as prolonged lockdown may have severe impact on economy and earnings. 4QFY20 earning season is set to kick-off and we expect substantial cut in management guidance for FY21. Prime Minster had pitched for help/ sacrifice from the citizen to combat corona virus outbreak, however, this needs to be accompanied by a strong financial pitch from the Government side. And that hasn't happened yet, which is very worrying.
A classic catch-22 situation to persist: Unlike any other financial crisis of past, current crisis have direct conflict between health & economy, which is classical catch 22 situation for all major stakeholders. We prioritize one and the other suffers in equal & opposite direction and yet one cannot exist without the other. In our view situation will be clear at some point but till then this current condition to persist. One of the important developments to watch will be the successfully launch of vacation for COVID-19. Given the past experience it may take at least 3-4 quarters to commercially launch vacation and thus we expect this current situation to persist till then.
Fear of second wave of virus will keep economic activities at lower level: Increasing concerns over a resurgence of COVID-19 virus have led to a choppy return to regular life in many Asian counties. Many countries that started to feel hopes that their responses to pandemic were bearing fruit are reintroducing restrictions. The moves by these countries are troublesome indication for a rest of the world which is still battling a surging outbreak. Thus we expect economic activities to remain at lower level till next winter or the successful launch of vacation. Similar view was shared by the Dr Keyu Jin – An expert on China matter; with whom we have webinar for our clients last week. She shared that second wave of more virulent infections are possible by autumn as Virus can mutate in unknown ways and thus the danger is far from over. According to her Chinese economy is operating at half the stated capacity. As a result we may continue to see displacement among the various businesses and thus remain very selective in our recommendation.
More direct fiscal intervention by GOI may come post the current lockdown is lifted: In our view RBI has fired maximum of its bullets but failed to address the key concern of fast slowing economy. Now the ball is again in GOI court to provide fiscal packages to those businesses which are impacted due to outbreak of COVID-19. In our view India would need to increase the fiscal intervention from current 1% of GDP to closer to level of 10% offered by many countries. But it is uncertain when the second stimulus package will come from GOI
Our View: We are living in an unprecedented time and dealing with an unknown unknown. We expect a deeper cut in earnings & management guidance as economic activities may remain at a much lower level even after lifting of lockdown post 3rd May. In our view lockdown is only a stopgap arrangement between onset of the epidemic & the launch of vaccine. Distancing measure is logically not possible for an extended period of time and thus, we may see infections spiking again after people come out post the lifting of the lockdown. Thus, combination of negative news flows and valuations that are higher than the previous crisis (global financial crisis of '08) may leave the market vulnerable to near-term downside. However, the market outlook can improve if earnings start to recover in the second half of FY21. Therefore we continue to recommend re-allocation of investments towards companies with strong balance sheets and relatively better top-line growth prospects in the current situation. We like Biocon, Granules India & Alkem from Pharma, Bharti from Telecom, HCL Tech & Infosys from IT, Godrej Consumer, Dabur, ITC, & United Spirits from FMCG, BPCL & Petronet LNG from Oil & Gas, HDFC Bank, Kotak Bank, SBI & MCX from financial and L&T, Ultratech, KNR construction from construction & infra sector and expect them to relatively outperform the border market.
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