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World economy battles COVID-19 with Lockdowns in April, India GDP growth slows to a crawl

A virtual economic shutdown in April has put many companies in a tough spot, only the best companies with enough cash reserves are likely to come out on top.

Just a few months back, even if a movie had tried to sell a story where the whole world is in lockdown mode, it would not have found any buyers for the idea. What we saw in April was unprecedented, with nearly every part of the developed world in a lockdown mode. Though the spread of COVID-19, and related deaths, have risen to some crazy levels, the good news is that the rate of the spread seems to be diminishing. 

The COVID-19 related impact in India seems to be lower than in many parts of the world. The objective of the lockdown was to ‘flatten the curve’ and that seems to be working. It is no time to cheer though and caution is called for. There is no point in withering away the advantage gained over the past few weeks. 

With the world governments debating hard between ‘saving lives’ and ‘saving livelihoods’, we expect a gradual withdrawal of the lockdowns.  Based on the guidelines announced by the Indian government, essential services are expected to be opened up first. Offices, factories and agriculture are expected to start functioning gradually but also blending in social distancing. Non-essential parts of the economy will be opened up gradually in a manner which reduces the risk of a further outbreak of COVID-19. Given the circumstances, this seems to be the most likely way forward.

With a near-complete lockdown of the economy, the overall impact on the GDP is expected to be severe. Companies directly affected by the change in customer demand patterns will find it difficult to recover. Other companies, where customer demand patterns are stable (or in some cases, see a positive shift over the longer term) should weather this storm and come out stronger on the other side. In such times, cash-rich companies operating in simple businesses tend to hold up better.

The Nifty had reached a high of 12,430 on 20-Feb-2020 and then corrected to a low of 7,511 on 24-Mar-2020, down nearly 40% from the peak. Since then, the Nifty has been steadily gaining ground and currently is at 9859.9 (still down 21% from peak level). The recovery was due to a combination of some plateauing of COVID-19 and also a globally coordinated regulatory response in the form of a stimulus. 

We expect the next few months to be volatile for equity markets. On the other hand, many of the large companies in the Nifty are stable and cash-rich. They are well-positioned to handle the current weakness and should do better than competitors as the economy recovers.

Though equity markets recovered, news from the debt market side has not been good. Issues related to corporate credit risk and liquidity in the corporate bond market hit investors hard, with one large mutual fund house shutting down 6 of its schemes. 

Though investors are likely to get a reasonable proportion of their money back, the timing of the same is not clear. India has been struggling to create an active corporate bond market for a long time and situations like these sets back such aspirations by several years. 

We have always found merit in investors sticking with the safe end of the spectrum – reduced credit risk, reduced interest rate risk and reduced liquidity risk. Conditions like these further our conviction that this is the way to go for bond investors. If you want to risk your capital, equity markets offer better hunting grounds. In debt markets, stick with safety first.

On the whole, conditions are fairly tough for investors. We believe things will return to normal as long as the lockdown is lifted. We don’t expect COVID-19 to disappear off the face of the earth, but the intensity of the spread and impact of the disease will get controlled. 

One will keep seeing a lot of news flow around this subject over the next several months. Watch out for corporate performance and only that will give you a true picture of the risks to your portfolio. There will be some bankruptcies, but there will also be many companies that will weather the storm well. 

Indices  and benchmarks in April

Equity

Debt

Indian Mutual Fund Industry as of March 2020

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