Nifty actually bottomed close to the announcement of lockdown 1.0; In every phase (barring phase-3), the market actually moved higher; With Unlock 1.0 being in force, all eyes are on how well the resumption of economic activity
After a long lockdown, India is slowly opening for business. To be fair, it's a roll of dice moment for the Indian government. It could always continue the lockdown, but that would come with huge economic costs. For the average man, it is a time to be cautious, because the health risk from Covid-19 is still far from over. But keeping the lockdown intact across India has already hit the economic health of people quite hard. India, partly due to its large population, has racked up over 3.22 lakh cases (as on June 13), with more than 1.5 lakh active cases and over 9,200 deaths due to Covid-19. The headline numbers look bad, and today India is the 4th worst affected country after the USA, Brazil and Russia. For India, every week of lockdown means potential losses to the tune of trillions of rupees in as factory gates remain shut, consumers avoid transactions, and loans pile up.
During the five phases of lockdown announced so far, stock markets have moved in a manner that can be explained by Mr Market only. The market movements with lockdowns have been interesting, to say the least. Nifty actually bottomed close to the announcement of the first lockdown. In fact, in almost every phase, the market has actually moved higher (barring phase 3). The recent announcements of unlocking along with global liquidity have propped up the markets significantly higher. As growth estimates were slashed and earnings picture dimmed, stocks continued to move higher after hitting their nadir on March 23. In a sense, surging stock markets had discounted the bad news. With the economy now slowly re-opening, all eyes are on how well the economy is doing. Brokerages and economic experts are studying each and every sector as the 'unlockdown' of business happens. In this article, we take a look at the topic and try to tell investors what to expect in the coming days. Read on.
Near-term data on demand recovery, capacity utilization and labor issues in consumption-related sectors may help in getting a better handle on earnings. However, stock prices are already trading near pre-Covid-19 levels despite downgrades to F2022E EPS (earnings per share). Near-term data may be more relevant for financials stocks in terms of assessing the eventual level of NPLs (non-performing loans) and credit costs as value exists in financials stocks assuming the situation ‘normalizes’ rapidly, says Kotak Institutional Equities.
There are two (somewhat obvious) points about the economic recovery: (1) demand for most goods and services will bounce back from depressed levels of April-May 2020, the period of strict lockdown in India; there is limited reason to get excited about the same, and (2) demand for most goods and services in FY2022 will be likely lower than pre-Covid-19 estimates for FY2022 even assuming a smooth recovery in the economy.
"We rule out a quick discovery of a vaccine against Covid-19 and a large fiscal stimulus that can result in faster recovery in demand," says Kotak Institutional Equities.
What's moving, What not
Goods are beginning to move (E-Way bills +50%), factories beginning to produce (30–70% utilization), retail shutters are being rolled up (60–70%), and industrial production (70–80%) is driving discretionary consumption (30–40%), while staples are almost at full stretch (80–90%), according to Edelweiss Research.
A few sectors are yet to resume work meaningfully (airlines, hotels, entertainment); excluding these, June should settle the supply. One thing is clear: Unwinding is very much on. The month of June should only accelerate it. India’s aggressive lockdown is being wound down. It’s in the terminology (Unlock 1.0 vis-a-vis Lockdown 5.0), approach (exclusions vis-a-vis inclusions, and only containment areas with hard restrictions) and relaxations in people movement (and its implementation).
"This shows up in data trends: rising factory activity but at average below 50 per cent, accelerating opening-ups (factories, shops, cities) and daily data plots (electricity, E-Way bills, traffic). With travel (air, rail and road) and markets getting back on track (and malls soon), June should mark an acceleration, and a near normalisation. The unrelenting rapid spread of the virus notwithstanding, equity markets’ recent buoyancy seems to be tracking supply," says Edelweiss Research.
People are also beginning to move; Google Mobility data suggest Indians are ‘getting to their feet’. This is still materially down year over year, but people are beginning to step out of homes. It is very much essentials-based: grocery and essentials are down by a modest 10 per cent, whereas entertainment is down a significant 69 per cent, and work from home is moderating with workplace activity down 38 per cent in May, but remains significant. June should be different: early anecdotal telltale signs indicate India has had quite enough of being locked down, and people are stepping out as markets open up.
Improving Picture, But Still Dismal
Survey data, not as hard as mobility or daily data measures, reflect an improving May over April, but it is a grim picture nevertheless: PMIs – Services and Manufacturing – stand around the 30-odd level in May, unemployment is closer to 23 per cent (from an 8% pre-Covid-19), and new job activity on portals is very diminished. While some of these data measures are probably the most impacted from a collection dislocation perspective, it does reflect the extent of the shutdown.
"An interesting data point that does stand out though is on unemployment: even as it suggests a disheartening loss of jobs (120m-plus unemployment in April), it suggests that almost 20m jobs have been recovered or recreated in May, suggesting that the bounce-back is broad-based and, like activity, jobs could also be reverting to the mean. This data point - while caveated with collection challenges – has come in before the surprise US jobs data release (2.5m jobs added), and could reflect a somewhat similar trend. While in India this might get a little complicated due to the large-scale migration of workforce to native rural areas in the wake of the lockdown – and may be significantly slower in coming back – it does reflect a relatively high level of labor flexibility," Edelweiss Research added.
Rural Faster Than Urban
All of us have read about how biscuits are possibly selling more than ever. This biscuit story is an urban thing. Truth be told, analysts and experts see rural parts of the country doing better than urban centres. This is because 30 cities, which contribute 80 per cent of coronavirus cases, have seen maximum curbs. Villages are not that coronavirus affected so far, something that could change soon as over 3,000 Shramik special trains bring migrant workers back home. As of now, rural is where the hope for resistance lies.
Looking at May data it is early to take a call on discretionary spending and the broader auto sector in particular: the retail/distribution shutdown itself fundamentally limiting any activity. Experts reckon this being the most stretched part of the demand chain, and potentially amongst the slowest to come back. It is, however, also a key to setting medium-term demand expectations for the economy: given its visibility, the wide ecosystem that it sustains in the economy and the possibility of a government-led demand stimulus through GST cuts.
That said, the agriculture sector – as reflected by fertilizer demand – largely untouched by the lockdown (in fact bolstered by some direct cash distribution by the government, and an obvious absorber of returning migrant labor) – is on a roll. It is probably the only offset in an otherwise stalled economy.
Basic, intermediary and B2B businesses have opened up more progressively, and the average capacity utilisation rates are distinctly higher than consumer-facing ones. This relatively quick reversal is a likely mix of lower worker intensity, more trade activity, and likely greater storage capacity. Some believe these businesses could well be touching 80-90 per cent capacity utilisation by the end of June, and from a supply side/lockdown perspective, their restrictions are near an end.
Need More Spending Power As Economy Re-Opens
There is a notion that as India went into Lockdown, consumer savings continued to surge. This is a popular approach, but reality is that many people have seen salary cuts, job losses and held-up payments from clients. There is no question of a savings surge if income is under the cloud.
During the global financial crisis, to minimize the impact on the Indian economy, packages of measures were announced by the then Government and various estimates peg such values to 2.4%-3.5% of GDP. The nature of the crisis was such that there was no transfer to individuals, but mostly stimulating consumption through indirect tax cuts. The combined fiscal deficit (Centre and States), including the special securities issued to oil marketing and fertiliser companies, thus, reached 10.7 per cent of GDP in 2008-09 (RBI).
"This time more than 10 per cent of the fiscal package has been in the form of transfer to individuals (includes DBT, cylinders, EPFO Contribution, Insurance, food for migrants and poor families).
"However, so far the Government consumption has been much more restrained in this package and it is more about supporting businesses through liquidity. A study pegs the value of capital expenditure impact multiplier in India at 2.45. The present situation warrants more cash transfers and increased capital expenditures however, as the crisis is at an unprecedented scale and has severely impacted peoples’ ability to eke out a livelihood," writes Dr Soumya Kanti Ghosh, Group Chief Economic Adviser, State Bank of India in his report 'Are people turning frugal in lockdown: Choice is also between lives and livelihood and lives!'
Additionally, evidence also suggests the more severe and prolonged the economic downturn, the higher the share of households that will be liquidity constrained and the more households will need to use transfer income for basic needs, pushing up overall marginal propensity to consume and a faster recovery. As Indian economy re-opens, the onus is on the government to make sure cash reaches the household so that sending can start its virtuous cycle. Left on their own, people will control spending and thus bringing no real benefit to businesses beyond the staples. Giving income tax or GST rebates is not going to make people spend the money they indirectly save. There is a need to go for Stimulus 2.0 that not only releases funds to middle and lower class households, but also ensures government as well private sector pending payments are immediately sent to respective bank accounts.
The writer is a journalist with 14 years of experience