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Moneycontrol Pro Weekender | The Second Coming 

What happens when these lockdowns are relaxed? And what if a third wave strikes?

May 15, 2021 / 10:34 AM IST
Let's take a look at these 6 trends in HNI investing in current environment, as observed by Vinay Ahuja of IIFL Wealth

Let's take a look at these 6 trends in HNI investing in current environment, as observed by Vinay Ahuja of IIFL Wealth

Dear Reader,

There were some signs this week that the worst of the dark times may be behind us. Total new infections, or at least the official numbers, have been coming down. The supply of hospital beds, oxygen supply and medicines has improved, although there are still reports of deaths from lack of oxygen. The hope that we will soon turn the corner is what is supporting the equity markets.

The breaking of the second COVID wave has been due to the restrictions on activity in most states, restrictions that are taking a heavy toll on the economy, as our recovery tracker shows. What happens when these lockdowns are eased? And what happens if a third wave strikes?

Next time, hopefully, we will be better prepared and the courts will not have to step in to protect something as basic as the right to life. To be sure, the immediate need is to ensure  ICU beds, ventilators, oxygen and medicines are made available promptly. But the answer to both the questions posed above lies in two words: get vaccinated. What we need to open up the economy and survive future waves of the virus is immunity.

The government hasn’t exactly covered itself with glory on ensuring the supply of vaccines and it has faced much criticism on this account. It now says there’ll be plenty of vaccines available by August. We took a close look at how soon we may reach the promised land of herd immunity and what would be the best investment strategy in the interim.

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One obvious strategy is to bet on the companies catering to the need for immunity. Cadila Healthcare is one such company. Lupin too is interested in COVID drugs, for which it is looking for licensing and distribution tie-ups. Another game plan is to look at businesses that cater to foreign demand, and technology companies such as Happiest Minds and L&T Infotech are examples, although you have to be mindful of the former’s rich valuation.

The March quarter’s corporate results have generally been good, but for some expensive stocks such as Avenue Supermarts and UltraTech Cement, it’s best to buy on dips. Companies such as CSB Bank and Hero MotoCorp are available at reasonable valuations.

The spike in commodity prices could be another theme for investors to bet on. We considered whether Jindal Steel and Power could be one way to play it.

One reason why the stock markets have been resilient is because the pandemic has hurt smaller firms far more than the big players, who have gained market share. Pidilite Industries is one such company.

Defensive bets like Gillette India and Dabur India could also be considered. Praj Industries, which supplies plant and machinery for ethanol manufacturing, is a play on the government’s push for ethanol blending to reduce dependence on imported fuel.

What could go wrong? The spread of the second wave to rural India, with its ramshackle health infrastructure, could be disastrous and there have been gruesome reports of bodies floating down the Ganges. There is also likely to be a serious economic impact. The FMCG sector’s main growth engine was rural India and the second wave could upend that. The weakness in Bandhan Bank may be an indicator of things to come.

For the overall Indian economy, we had a chart on the aggregate effect of lockdowns on India’s overall GDP. PNB’s QIP prospectus tells us that asset quality in Indian banks may not be as resilient as expected.

The markets’ hope that the economy will rebound strongly once the vaccinations are in place is based on the examples in the developed economies. This week, Bank of England chief economist Andrew Haldane said Britain’s economy will bounce back from COVID-19 like a tennis ball. Haldane says that as health risks fall, households are spending the savings they had accumulated during the lockdowns, as are businesses. The key, said Haldane, is to ensure that the boom does not turn into a bust.

What could turn it into a bust is higher inflation. No wonder then that the US markets had an inflation scare this week, in spite of the US Fed maintaining that the price rise is due to a mix of supply constraints and pent-up demand, which is transitory. That may well be the case, but it’s also true that ultra-loose monetary policy has fuelled liquidity flows into commodities. Haldane has argued for a throttling back of monetary stimulus. He said, "This is not a case of slamming on the brakes, but rather gently taking our foot off the accelerator. Doing so now reduces the risk of a handbrake turn – for borrowing costs and the economy – down the road, with all of the disruption this would entail for our jobs and finances." But talk of tapering is not what the markets want.

The second wave has seen many masks slip, sometimes uncovering the skull beneath the skin. Commenting on India’s governance, Moody’s said this week in a report, "Weakness in policy effectiveness… hampers the sovereign’s capacity to respond to negative environmental and social shocks and trends." But is it only lack of state capacity that is the problem? Or does it go much deeper? And will things be hunky-dory once the COVID monster is killed?

In 1919, the Irish poet William Butler Yeats penned ‘The Second Coming’, which had these famous lines of a world spinning out of control:

‘Things fall apart; the centre cannot hold;

Mere anarchy is loosed upon the world

The blood-dimmed tide is loosed, and everywhere

The ceremony of innocence is drowned;

The best lack all conviction, while the worst

Are full of passionate intensity.’

During the Spanish Flu, Yeats’ pregnant wife caught the virus and was very close to death. Of course, those years also saw the end of the First World War with its terrible carnage, the Russian Revolution and an Irish uprising against the English, but it is entirely possible that his wife’s illness could also have gone into the making of the poem.

Stay safe,

Manas Chakravarty
Manas Chakravarty
first published: May 15, 2021 10:34 am

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