Investing in Times of Coronavirus
There has been a bloodbath in stock markets globally. Indian equity indices are no different. The trigger is the rapid spread of coronavirus that is leading to shutdown of businesses, lockdown of big industrial towns, even entire countries (such as Italy), apart from snapping of supply chains, across continents. A further spread will trigger an even sharper correction, say experts. "At the start of the year, only companies with dominant China exposure were affected. Later, as the pandemic spread, stock prices of Indian exporters also corrected, primarily on demand concerns.
If the virus continues to spread and results in a contagion in India, stock markets could face a sharper correction depending on the intensity of the spread," says Nimesh Chandan, Head Investment Equities, Canara Robeco Mutual Fund. As we go to press, the BSE Sensex and the NSE Nifty are down over 17 per cent this year. Small and Mid-cap indices, considered more volatile, have also corrected. BSE-Mid-cap and BSE Small-cap indices are down 15.56 per cent and 14.14 per cent, respectively, this year.
Though coronavirus is the immediate trigger, it has come on top of other worries, albeit not as deadly as the pandemic that has killed 4,000-plus people globally. The Indian economy has been experiencing a sharp slowdown for several quarters now with GDP growth touching 4.5 per cent in the September 2019 quarter, the lowest in six years. Despite this, stock indices kept rising, with the Sensex closing at a record high of 41,952 on January 14. "India has been trading at extremely high valuations. Hence, the correction is justified, with coronavirus being the scapegoat," says Umesh Mehta, Head of Research, Samco Securities. "The fall is panic driven (due to coronavirus) and is causing pressure on D-Street," he says.
The virus preyed on the nervousness that was already there among market participants. "India is part of the emerging market asset class. Significant money comes into India from Emerging Market Exchange Traded Funds (EM ETFs). China has the largest weight in EM ETFs. Hence, if the Chinese economy is seen to be suffering, money moves out of these ETFs. The selling is across the holdings and, hence, Indian stocks also see selling pressure," says Prateek Agrawal, Business Head & CIO, ASK Investment Managers.
Blessing in Disguise?
As coronavirus fears fade a few months into the new financial year, as is being hoped, can India turn this crisis into an opportunity? Experts say as global companies learn from the current crisis and reduce their dependence on supply chains with origins in China, can India provide them an alternative as a supply base considering its cheap labour and talent base? "In many sectors, Indian companies have strong capabilities to compete internationally. In the past few years, due to rising costs in China, Indian competitiveness has improved," says Chandan of Canara Robeco Mutual Fund.
In September last year, the government had announced tax incentives for setting up manufacturing facilities in India. "There will be quite a few global players who would want to diversify their sourcing base and add Indian suppliers to mitigate (country specific) risks in the future," he adds. Others agree. "There has been a huge global supply chain disturbance. China accounts for 24.8 per cent of global manufacturing capacity while India's share is just 3 per cent.
In the long run, India can see a supply chain shift if the government is proactive," says A.K. Prabhakar, Head of Research, IDBI Capital. "India is likely to be a prime beneficiary of this shift. However, this will happen over the medium to long term. Also, in case of India, a lot will depend on how quickly the government can address land and labour issues (biggest impediments to manufacturing in India) and woo global manufacturers," says Alok Agarwala, Head, Research & Advisory, Bajaj Capital.
"We expect current issues in China to be a double-edged sword. On the one hand, India has to rapidly shed dependency on Chinese imports, and on the other hand, it has to strategically ramp up production to cater to the cost-effective global raw material demand/needs. We believe India is strategically placed to cater to excess demand in certain sectors," says Mehta of Samco.
Some see things differently. "It is difficult to say if a slowdown in China is a blessing in disguise for India as shutdown of manufacturing plants there is creating supply chain rifts across the globe," says Ajit Mishra, VP Research, Religare Broking. He says India's auto and metal industries also depend on China for key components and are getting hit. "A few pockets can benefit. For instance, textile, sanitaryware and ceramic players may gain as exports increase due to supply constraints in China. Also, decline in oil prices due to outbreak of the virus could benefit India's oil marketing, paint and aviation companies by reducing their input costs," says Mishra.
Investment Opportunities
The Indian economy has been facing a slowdown for long. However, things started looking up after the corporate tax rate cut in September 2019. The Index of Industrial Production rose 2 per cent in January. It had contracted 0.3 per cent in December last year, after recovering in November post three months of contraction. Transmission of lower interest rates, too, had started, as noted by the RBI in its monetary policy statement on February 6, while credit growth was just about to turn the corner, when coronavirus struck.
While markets will remain under pressure in the next few months, the supportive fiscal and monetary policies will start showing results in the second half of 2020. The government and the RBI have taken several steps to stimulate demand and investments. "The headwinds that had slowed the business cycle in the past few years are turning. The banking sector has provided for historical NPAs, GST has stabilised, liquidity is back in the system, and the worst seems to be behind for the NBFC sector" says Chandan.
Globally, too, governments and agencies are taking measures to stabilise the situation and restore investor confidence. Last week, the Federal Reserve cut rates by 50 basis points. The other central banks are likely to follow suit. "This is a well-timed move that should underpin financial market confidence. Investors were expecting a response from the US central bank, and the Fed showed itself ready to act promptly and decisively," says Sonal Desai, Chief Investment Officer (Fixed Income), Franklin Templeton Mutual Fund.
Experts say most of the weakness in macro conditions had been priced in and it was coronavirus that had taken everyone by surprise. "We believe with India's slowdown bottoming out and government announcing growth revival measures, we could see revival of demand in the coming quarters," says Mishra of Religare. All stock market indices, including the large-cap index, have fallen sharply, led by cyclical sectors such as banking, automobile and energy, due to fears of sharp slowdown in growth. After the correction, valuations look attractive across the broad spectrum of the market. "We believe that while there is a growth slowdown, the valuations are sustainable if one takes into account the reduced interest rates," says Prateek Agrawal of ASK. He believes the economy is improving incrementally with recovery being led by agriculture and related areas. This will be aided by improved current account deficit and lower oil prices. "We believe current market levels should be sustained. Given the sharp correction in valuations of the high quality part of the market (on account of earnings growth), we believe investors should focus there, particularly when the overall global situation is weak," he adds.
Falling oil prices will also be a boon for India. "The drop in oil prices will counteract some adverse effects of the virus shock by lowering input costs for businesses. Any inflationary impact from potential supply disruptions ahead is likely to offset by the disinflationary effects of lower gasoline prices. Additionally, sharp decline in global bond yields are also supporting lower domestic borrowing costs," Bloomberg has said in a recent report.
"We believe India's economy is bottoming out with expected FY20 GDP growth of 5 per cent likely to mark the bottom. However, recovery is likely to be weak and gradual as multiple segments of the economy are still in a difficult phase. While FY21 GDP growth is expected at 6 per cent, it is still lower than potential. Improvement in strained segments such as real estate, SMEs, autos, NBFCs is imperative for sustainable recovery," says an HDFC Securities report.
The Beneficiary Sectors
Here are some sectors that experts believe are likely to do well. "Given the impact of coronavirus on the global front, sectors such as textiles, tyres and specialty chemicals may experience higher demand," says Mehta of SAMCO. He says a few players such as Raymond and Trident may benefit in the textile space. Also, players with huge dependence on crude oil will benefit from declining crude oil prices. One such company is Asian Paints.
FMCG: Experts say India's economic slowdown is bottoming out and announcement of growth revival measures could revive demand in domestic-driven sectors. FMCG is one such sector. "Sectors like FMCG should do well as they are not impacted by the virus-related slowdown, if any. Moreover, they stand to benefit from lower input prices. Commodity prices are falling on expectations of lower global growth," says Agrawal. Also, oil prices have fallen sharply of late. This should allow FMCG companies to compensate for any volume pressure with margin expansion.
Banking and financial: Rate-sensitive sectors such as retail banks with deep penetration and NBFCs with properly managed ALM (asset-liability mismatches) are expected to do well as credit growth picks up. Given the global monetary easing, lower inflation and global slowdown, experts expect interest rates to fall further. "Lower interest rates will enable this space to deliver a net interest margin increase that can compensate for any decline in AUM growth," says Prateek Agrawal of ASK. The recent market fall means many quality consumer and retail financing businesses are available at attractive valuations. "In the banking space, one can buy Axis Bank as it posted decent numbers for Q3FY20. Its loan growth, as well as asset quality, improved. We remain positive on the bank's long-term plan," says Mishra.
Chemicals: Chemical companies are expected to benefit as buyers develop a second source after China. A small swing in buyer preference could mean a large percentage gain for Indian businesses.
What You Should Do
Don't Panic: Let the dust settle before taking a decision. "It is good to see that midcaps and smallcaps havent underperformed largecaps in this correction. This shows valuation support in these segments. As growth recovers, these segments may lead the rally" says Alok Agarwala of Bajaj Capital.
Stick to quality: At this point in time, when global markets are in a selloff mode, "a prudent approach will be to stick to quality stocks, strong promoter record and good growth prospects. Further, considering the volatility, invest in a phased manner," says Mishra. "Invest in companies which have resilient balance sheets and operate with sufficient cash. Hunt for companies where conversion of sales into free cash flow is easy and visible. Investors should cherry-pick quality stocks in a staggered manner as every dip seems to be a good buying opportunity. Selling stocks in this fall will turn out to be more harmful than anticipated," says Mehta.
Scout for better valuations: The volatility will continue in the near term. This, however, presents an opportunity for investors to build a portfolio of stocks that are not richly valued. "This strategy should result in a good upside once the fear around coronavirus subsides," says Harsha Upadhaya, CIO Equity, Kotak Mutual Fund.
Look beyond large caps: Some experts believe the recovery, once it starts, is going to be broad-based. "The last rally was highly polarised with only a few stocks from the large cap space participating. We believe that when the market starts recovering, it is going to be a broad-based rally," says Deepak Jasani, Head of Retail Research, HDFC Securities. Given this situation, it makes sense to invest in quality stocks from the mid- and small-cap space. Historically, mid- and small-cap spaces have rewarded investors handsomely after a major fall, which is the case now.
Make volatility your friend: Volatility is going to be the norm. If you are planning to invest for three-five years, take the benefit of subdued market sentiment and buy companies with good growth potential and managements.
You should stagger your investments over different price points or take the SIP route to average out the cost of acquisition and remain invested for the rest of the investment period to maximise returns. An ace investor has rightly said, "Time in the market is more important than timing the market". Do a thorough research before zeroing in on the stocks or take help from experts before committing serious money.
