Luck Has Still Not Run Out For Bears?

Mailer_Mar_2020

No hiding from the fact that we are going through an extraordinarily difficult time for the market. Precisely when we thought that the luck has run out for bears in the broader space, market has been hit by a double whammy of COVID and Oil price war. This is after a glimpse of hope (from the first signs of momentum in small and midcaps in Jan-Feb) that things may be turning after a long and painful bear phase in the broader markets. The light at the end of tunnel turned out to be that of a speeding train. It does test the tenacity of last few standing value investors. Outbreak is not limited only to COVID in this social-media-driven frenzied world. Everything is an outbreak, but with a short shelf-life in such a wacky world. After this final (hopefully), but a painful lap of capitulation, as one may call it, with more or less everyone throwing in the towel, is there a hope for the few who are left.

In the short-run, what would happen is anyone’s guess. On one side, COVID news-flow will keep the markets edgy while on the other side, the talk of stimulus from Govts and the hope of co-ordinated actions from central banks will keep the market’s hope alive.  Push and pull forces from these opposing news-flows are expected to keep the markets extremely volatile in the short-term.

But what about medium term?

Right now, market is in the mode of scoot and run. First sell and then think later. In such a mayhem, it is easy to lose sight of anything that is not in the immediate vicinity. But when the dust settles, market may start looking at some of the India specific opportunities (listed below) that are arising out of this double whammy crisis i.e. boiling corona amid plunging oil.

  • Oil price, if it is sustained at this or around the current level, will give a huge headroom for both fiscal and monetary stimulus. RBI, constrained currently by inflationary challenges, will have more elbow room to cut rates. Similarly, with reduced oil price, govt. will get the additional leeway to hike spending or pass on the benefits in oil price to stimulate consumption.
  • Covid crisis is now expected to accelerate the china-hedging process that has already begun post US-China trade war in many of the global corporates. Reducing china dependency is no longer a cock-tail discussion for many companies worldwide. It is a serious issue facing many boards today. When it is translated into action, India is likely to be one of the potential beneficiaries, esp. in industries where India is globally competitive. This is likely to incrementally boost growth in the medium to long-term, esp. with the new concessionary corporate tax regime of 15% for the new investments in manufacturing.
  • Amid the rising fears of global slowdown and recession, it is important to remember that the following factors that are likely to alleviate the impact on India.
      • India is coming off from a deep deleveraging cycle and a decade low growth. Since impact from global recession is mainly fed thro’ credit crisis, given the deleveraging that has already happened in many of the balance sheets, impact from global recession is likely to be limited on this aspect.
      • Being domestic and that too consumption driven economy, India will be relatively insulated. Since it is coming off from a low base, any incremental growth that can potentially come from low oil prices and from china hedging, will look respectable for global investors. In such a scenario, out-performance of Indian markets can’t be ruled out, esp. when India has more headroom in both fiscal and monetary policies in comparison with global peers.

It may sound cliché if we conclude this communique by saying that the darkest hour is just before the dawn. Many false dawns have come and gone, as we all know. But, is it not a mystery that the darkest hour in the night is not “mid-night” as anyone would intuitively think? The jury is still out there on why it is darkest just before the dawn. Is it a known-unknown?

Happy Value Investing!!

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