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Last Updated : Jul 04, 2020 07:28 PM IST | Source: Moneycontrol.com

Moneycontrol Pro Weekender | Shrinking less rapidly

We are into Unlock 2.0. Should we then expect a rebound in private economic activity, at least a temporary one? It's some way off.

Dear Reader,

The monthly Purchasing Managers Indices (PMIs) are a snapshot of private sector economic activity across the world. With the lockdowns easing, surely we should see a rebound, at least a temporary one? Unfortunately, not yet.

In India, the June Composite PMI showed that the economy continued to shrink from the previous month, albeit at a slower pace. That’s true for most economies. The strong man standing out is China, with its PMI showing robust expansion for the second month running. That could have been a glimmer of hope for some of our exports, were it not for the tension at the border. While imports from China were stalled at customs, India needs to think through its policy on imports, rather than go in for knee-jerk measures that end up shooting ourselves in the foot.


It’s hardly a surprise that new investment proposals fell to a 16-year low in the June quarter. Much hope has been reposed in government bailouts, but they have proved to be elusive so far in India. Indeed, instead of providing a fiscal boost, government spending fell in May from a year ago, as tax revenues collapsed and the government was worried about increasing the fiscal deficit, which the IMF predicts will be a huge 12.1 percent of GDP (including the states’ deficits) this fiscal. The government’s high excise duties on petrol and diesel have led to a bizarre situation where retail fuel prices are now higher than in 2013-14, when crude oil prices were over $100 a barrel. The government is desperate for revenue.

With exports in the doldrums, government spending curtailed and investment demand absent, a swift revival in consumption is the only hope for the economy. Rural demand could ride to the rescue, especially since the monsoons have been good so far. That strengthens the case for this agriculture-related stock. Sugar mills too should benefit from the higher output, provided government support remains intact. Our recovery tracker gauges the strength of the rebound in the economy.

Unfortunately, while the central government is now into what it calls Unlock 2.0, the continuing rise in new infections has spooked many state governments, which has led to fresh local lockdowns, which are worse than useless. The threat of renewed infection also looms large over re-opened businesses.

That’s not all. A study by the Bank for International Settlements found that the Indian corporate sector was the most in need of government support among the 19 advanced and emerging market economies considered. These vulnerabilities, in turn, would lead to bad loans in Indian banks, some of which are short of capital. Risk aversion could spike and bank lending fall, aborting a recovery. And if firms in the US are filing for bankruptcies at the fastest pace since 2013, there is all the more reason to fear a spate of bankruptcies in India, where government support has been minimal. The power sector, in particular, could be the next source of non-performing assets.

Amid this uncertain economic environment, analysts have to use all their ingenuity to come up with stock-picking strategies. One obvious one would be to consider niche sectors that have prospered as a result of the pandemic, such as personal hygiene or broking. Another strategy would be to focus on stocks that have beaten-down valuations, but have leadership and good prospects once a recovery is in place. Then there are defensive bets, companies that have something unique going for them and others that will benefit from long-term shifts in trends. Some stocks need to be bought only for the long haul, others offer good dividend yields. And, as usual, our independent research analysts also tell you what stocks you would be better off avoiding, at least for now.

The disconnect between the markets and the economy continues unabated. On Thursday, for instance, the Nasdaq reached another all-time high. While we ponder whether the froth in the market should worry investors, it is also entirely possible that such a disconnect is precisely what the central banks in the advanced economies are aiming at. The wealth effect, they hope, will pull up demand and growth in the wake of the stock markets. The usual argument is that the stock markets move up early in anticipation of economic growth. What if their moving up early is a condition of higher growth?

That may be an interesting idea, but will it work? Consider Japan, whose economy has been limping along for decades with a huge debt overhang and ultra-low interest rates. Many commentators believe we are at the threshold of a Japanification of the main developed economies. As if on cue, UK long-term government yields sank below Japan’s this week.


Manas Chakravarty
First Published on Jul 4, 2020 04:50 pm