India witnessed its steepest year on year decline with June-end GDP growth at -23.9 per cent due to the Covid-19 pandemic and the lockdown enforced to save lives, which adversely impacted livelihood across sectors.
Except the agriculture sector, which showed 3.4% YoY growth, all other sectors witnessed sharp de-growth. We don’t have the luxury of the developed world to spend money by increasing fiscal deficit without facing the consequences from the rating agencies. The current crisis needs to be overcome through bold reforms to change the orbit of India’s growth. In this regard, supporting our Abhimanyus (entrepreneurs) to break the chakravyuh of un-competitiveness is important. We need to lower logistics cost by removing subsidy of passenger fare from freight charges and lower power cost by removing the subsidy burden for free agriculture power on industrial power.
Roll out the red carpet model of Sanand where Tata Motors could set up a plant at a record pace for firms shifting out of China. Our benchmark should be to encourage global companies to prosper here, just like Vietnam, where Samsung contributes to over 28 per cent of its GDP with a $62 billion turnover.
India can raise additional resources by monetising its assets (Rs 1 trillion) held under ‘custodian of enemy property’. Similarly, the Indian government can undertake strategic divestment of PSUs to unlock value. The government can also seek to monetize gold holdings by incentivising its financial-isation.
There are also some suggestions that government can monetise the fiscal deficit. In our view, the same effect can be obtained by increasing money velocity; i.e. the government can increase credit offtake by banks and financial institutions to improve circulation and boost demand in the system. Our strategy should follow what former UK Prime Minister Margaret Thatcher did to turn around the economy through privatisation and cost cutting - create a separate judicial infrastructure for faster resolution of commercial disputes.
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The rule of law is a prerequisite for entrepreneurs to invest. In short, the government’s focus on ease of doing business has to be in mission mode. India’s entrepreneur is an Abhimanyu fighting in the chakryvuh of regulations. The government will have to play a ‘saarthi’ to this wealth creator and bring his/her projects out from this chakravyuh.
Nifty is looking strong in a scenario when GDP is contracting. This is because a bulk of the upmove has happened with only 15-20 stocks taking the lead. A very wide polarisation between the companies is being seen, and one can also see the pain of the economy, which is reflected in the bottom 35 stocks of the Nifty50.
The market is expecting a medical solution in couple of months and resumption of economic activity. The market also believes by then the impact of monetary and fiscal measures will begin to translate on the ground. Higher capital flows, low oil prices, a good monsoon are among the factors which can make one hopeful about the future and the market is looking ahead with optimism.
The key thing for the market is to maintain its momentum. If normalcy returns to economic activity, then the broader market will continue to move forward. But if normalcy does not resume and we go back to a situation of a start-stop kind of model, then probably defensives will continue to outperform the market. In my opinion, the biggest factor to influence the market will be how the medical situation develops in India.
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From investment stand point, we are neutral on equities, though there is scope for being selectively opportunistic. Pharma and IT stocks are likely to outperform for some more time. The government has taken many initiatives to popularise ‘Make in India’, and we believe there are two particular sectors -- chemicals and contract manufacturing -- where there could be stupendous opportunity, just like the IT sector in 2000. Also, as the government unveiled policy for the electronics, electricals and defence sectors, we will see opportunity arise in those sector as well, depending on how things get executed on the ground.
But, investors who have put their money in penny stocks must be watchful as a lot of them have run up probably without the backing of fundamentals and merely due to increased participation.
In closing, a good financial adviser enables the investor to ride thorough this sentimental wave and helps them emerge better off over the business cycle. We believe IAP has increased investor’s financial knowledge. IFAs must leverage this rising awareness and keep their investor base steady to help them gain from a better future ahead. Distributors can also add value by suggesting prudent asset allocation to their clients, which will be critical in helping ride out this period. Equity overweight investors can consider dynamic asset allocation strategy.
A BAF (balanced advantage fund) strategy that has low downside risk and higher upside potential provides a good investing option. Conservative investors can consider a debt hybrid strategy, where the equity component is 25% or less. This strategy keeps the equity risk limited and allows for the debt component to anchor the investment and keeps volatility low. The equity component may deliver when equity markets enter bullish period. We had been suggesting investors to look at gold allocation since beginning of March 2020 as we believe it is likely to do well. We are still bullish as central banks continue to cut rates and pump liquidity. Gold ETFs across the world have received significant flows and today gold ETF flows are higher than equity ETF flows.
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On the debt fund side, we had been suggesting investors not to redeem investments from good quality credit risk funds, as it was opportune time to stay invested. In the medium term, one can invest from a three-year perspective as the current elevated credit spreads provide attractive opportunity to cash in on. We believe it is time to be long on duration for those willing to live with a little more volatility and have three-year-plus horizon.
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
