In keeping with the sentiments of the season, the Reserve Bank of India’s assessment of the state of the economy this month is relentlessly ebullient. It waxes lyrical in unguarded moments -- sample, for instance, this description of the Indian economy ‘breaking out amidst winter’s lengthening shadows towards a place in the sunlight’ or the discovery that ‘important forces are conspiring to bless this turning of the page on the virus’.
In case you thought the government’s response to the pandemic has been Scrooge-like, the RBI reassures us "there is a system to the fiscal stimulus, a ‘method’ if you will… The fiscal measures have been sequenced in a designed shift in focus from consumption expenditure in Pradhan Mantri Garib Kalyan Package (PMGKP) to investment expenditure in Aatma Nirbhar 2.0 and 3.0". In 2020-21, above-the-line fiscal stimulus will provide a boost of 2 percent to GDP.
Did you think the high frequency economic indicators are delivering a mixed message on the recovery? The RBI urges you to look beyond such trifles—it says companies are already doing so and that points to a turnaround in forward earnings estimates for many companies, in sectors ranging from auto to capital goods to healthcare, IT and FMCG. The farm sector is, of course, "forging ahead, backed by path-breaking marketing reforms". Admittedly, there are headwinds, but "good news still shines through".
The RBI’s GDP nowcast says growth is expected to be 0.1 percent from a year ago in the September-December 2020 quarter, a welcome return to growth after two quarters of contraction. With no second wave of the pandemic in India so far and a vaccine in the offing, the report says, "if the current momentum is maintained, the bounceback expected in the last quarter of the year may be stronger than postulated under baseline assumptions." In other words, it should be better than the 0.4 percent growth the RBI forecast for the second half of 2020-21 and the 14.2 percent predicted for the first half of 2021-22.
This is very good news. The RBI presumably has its finger on the pulse of the economy and there must be solid reasons for its report to read, in parts, like one prepared by a sell-side analyst. We too have no desire to be the Grinch this season -- we believe the vaccine will give a booster shot to the economy and the markets and the recovery in the new year will be full of opportunities, clustered around major themes such as digital services, housing and renewables and commodities. Of course, the trend towards digitisation brings with it many risks, as the recent SolarWinds hack underlined so forcefully.
But it would be dishonest if we do not acknowledge the troubles that still afflict people and businesses. There is no doubt that gaping holes in India’s health infrastructure were exposed this year. We also believe the year 2000 was K-shaped in more ways than one. Perhaps flexibility is the key mantra that business leaders will take away from the traumatic events of 2020.
Sunil Mathur, MD & CEO of Siemens, told us that a recovery in the capital goods sector is still some time away and the government should help industry by reducing the cost of doing business. And while the government’s Make in India initiative is excellent, Vinod Dasari, CEO, Royal Enfield is quite clear that, "At the end of the day, we don’t want to be contract manufacturers for the world".
Perhaps inspired by the performance of the equity markets, the RBI report says, "Pandemics spread fear and risk aversion, but they also uncover new opportunities and new avenues for animal spirits." Unfortunately, these unbridled animal spirits have "raised the forward Price-to-Earnings (PE) ratio to 27.2 at end-November 2020 from its long-term average of 17.4" for the Sensex.
We have, therefore, been forced to forage far and wide to discover hidden value in the stock markets. We looked at Persistent Systems, which trades at a discount to its mid-tier peers; at Shakti Pumps, a bargain bet with turnaround visibility; at Man Industries, with its order book and debt-free balance sheet providing comfort and at the attractively priced Antony Waste IPO. We also look at some stocks that, although pricey, still showed promise for long-term investors and those with high risk appetite.
The RBI report does point to a fly in the ointment, a thorn in the flesh, a worm in the bud which needs to be extirpated, eradicated and exterminated. It says, "efforts need to be redoubled to excoriate the ‘worm in the apple’ – inﬂation – before it hurts the impulses of growth that are taking root. Efficient, effective and timely supply management, including checking runaway retailer margins and reducing the incidence of indirect taxes on consumers, can break the back of the inﬂation pressures before they incipiently broaden and work against the intent of fiscal and monetary stimuli." We had pointed out from the minutes of the Monetary Policy Committee that "the discussion is starting to veer around from an exclusive focus on supporting growth to worrying about the impact of too much liquidity on inflation."
And finally, we looked at the craze for SPACs (Special Purpose Acquisition Companies) in the US markets. As we said here, when a SPAC raises money from its investors, it may or may not have a target company in mind. That reminds us of one of the most famous anecdotes in finance, probably apocryphal, of a promoter in the 1720 South Sea Bubble who lured investors into putting money in what he promised was “an undertaking of great advantage, but nobody to know what it is.” The parallels are unmistakable.
Compliments of the season,Manas Chakravarty