Moneycontrol Pro Weekender | Waiting for Sitharaman

Dear Reader,

Who would have thought that a virus present in bats could infect humans, via the unlikely medium of snake meat? Yet entire cities containing millions have been shut down in China, in an effort to contain the epidemic. At the time of writing this, the disease is spreading, although the World Health Organisation (WHO) has said it is too early to declare a global health emergency and the epidemic is at present confined to China.

It is no wonder then that the Shanghai Composite index has plunged. A hit to the Chinese economy will have ripples across the world, not least to the price of metals. Reuters says copper prices are on course for their biggest weekly drop in 17 months.

Economists and market analysts have lost no time in telling us what happened during previous pandemics. DBS Group Research’s Taimur Baig and Radhika Rao point out that the SARS (Severe Acute Respiratory Syndrome) outbreak in 2003 spread to two dozen countries and led to 774 deaths. On the economic cost of SARS, DBS Research says, "Hong Kong and Singapore saw about 100 bps decline in bond yields and a 15 percent decline in equity market valuation. The loss of GDP was as high as 2.5 percent for Hong Kong and around 0.5 percent for Singapore."

Stock markets in the rest of the world, after an initial wobble, have been resilient. For good reason. A chart from Charles Schwab shows that world markets recovered swiftly from any worries caused by the previous epidemic scares, such as the swine flu outbreak, the camel flu in 2013 or the Ebola outbreak in 2014.

In India, of course, the markets are now firmly fixated on the Union Budget 2020. The boilerplate advice by most commentators this time has been, "Sure, we know the true fiscal deficit is high, but in the context of the slowdown, we should forget about the deficit for now."

All that may be fine, but what exactly is the real fiscal deficit, after accounting for off-balance sheet borrowing? Surely we need transparency about that number before we decide whether the deficit is too high or not? That is why we said the government needs to come clean about the true state of the fiscal deficit in the Budget.

We looked at the data and found that the roots of the current slowdown lie in the credit crunch, which is why the finance minister must use the Budget to tell us how she will fix it. The Budget is bound to tell us of the government’s grand plans to boost capital spending on infrastructure, but here’s our take on the limits of what the government can do.

Investors should remember the ‘once bitten, twice shy’ maxim and recall that what was sold to them as a great opportunity turned out to be a great myth.

The December quarter corporate results continue to be iffy, with the macro challenges finally taking their toll on L&T, while banks such as Kotak Mahindra and Axis feel the heat. But the results are of the past quarter and the markets are already looking forward to a rosy future.

Easy financial conditions are providing the liquidity for a market rally on the expectation that better times lie ahead—the IMF predicts a decent bounce in the Indian economy next fiscal year. It’s also likely the worst may be over for the fast-moving consumer goods (FMCG) sector.

And, of course, last week saw the annual jamboree at Davos discussing the usual topics by the usual suspects, who badly need to walk the talk. But why worry? Bridgewater Associates co-CIO Bob Prince told Bloomberg at Davos the boom-bust cycle is over. Bank of America said it is ‘irrationally bullish risk assets’, at least till it all ends in tears. Perhaps that is why there have been a record junk bond sales in Europe.

Next week’s Union Budget comes at a time of crisis for the Indian economy. But such times of crisis have often proved to be great opportunities for root-and-branch reform. At times like these, when the finance minister is hemmed in on all sides, what is needed is inspired out-of-the-box thinking.

Will Nirmala Sitharaman rise to the occasion, thus ensuring a place for her in the history books? Here’s to hoping she delivers a Dream Budget.

Cheers,

Manas Chakravarty

PS: Since everyone’s eyes are going to be glued on the Budget, there will be no edition of the Weekender next Saturday. But do watch out for our special edition of the Panorama newsletter bringing you the key takeaways from the Budget.