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Moneycontrol Pro Weekender | How to surf the second wave

In spite of a strong recovery, the markets are jittery for a reason—parts of it could well be a bubble.

March 27, 2021 / 10:05 AM IST
(Representative image: Reuters)

(Representative image: Reuters)

Dear Reader,

Will the resurgence of coronavirus infections in India lead to a derailment of growth? If the Flash Purchasing Managers Indices for the developed economies are anything to go by, they won’t. Despite a second/third wave in the US, Europe and the UK, all these economies expanded this month, though the services sector in Europe is still in the dumps. But that’s probably due to the mess in rolling out vaccines there. India has learnt the hard way that lockdowns are no solution and they hurt the most vulnerable. The only way to combat the second wave is therefore to rapidly increase vaccinations. That, of course, spells opportunity for the firms making and distributing these vaccines.

While the rebound is strong, there are questions whether it is solely the result of fiscal and monetary stimulus. In India, that’s unlikely. Consider the facts: emerging out of the pandemic, the corporate sector is in fine fettle, after having deleveraged and cut costs. Banks have used the opportunity to bolster capital and increase provisions for bad debts. That means the twin balance sheet problem weighing down on the Indian economy is probably in the past, providing room for a cyclical upturn. Our proprietary weekly recovery tracker continues to be strong, despite the increase in COVID-19 cases.

What’s more, the government’s push to manufacturing may reverse the premature deindustrialisation that India has gone through, though it’s not going to be easy. Thankfully, Yale research has found that, contrary to the received wisdom, services could be India’s growth engine.

Government capex and policies have been supportive. N Srinivasan, vice-chairman and managing director, India Cements, told us that thanks to government spending on infrastructure, cement demand will remain high. Tata Metaliks is the stock to play the government’s focus on water infrastructure. The forthcoming PLI scheme for technical textiles could help Emmbi Industries. Bodal Chemicals, apart from its diversification, will also benefit from the government’s stress on import substitution. GMM Pfaudler will benefit from using India as a manufacturing base.

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Also cashing in on growth prospects are auto component companies such as Gabriel India. With strong external demand, it’s no wonder that auto component firms are further on the EV road than Indian auto companies. Nevertheless, the rebound in the commercial vehicle sector could also help stocks such as Shriram Transport Finance to re-rate. Craftsman Automation is another play on the CV space and its weak listing is an advantage for those wanting to invest.

There are other opportunistic plays, such as Cera Sanitaryware, which benefits from the container shortage and high shipping rates, which restrict imports. Surprisingly, the wobble in the IPO markets could be good news for investors. Anupam Rasayan’s weak listing makes it an attractive investment option. Post-IPO, Laxmi Organic’s balance sheet gets stronger and it is well placed for expansion. Of course, there’s no need to ride every post-IPO stock.

There are several other themes investors can bet on. For example, we pointed out that Indian Energy Exchange’s dominant position in the power trading space is a big advantage. We believe bulk drug manufacturer Bajaj Healthcare has compelling valuations. Accenture’s results show big IT companies can weather pay hikes. The Gangavaram acquisition, announced during the week, adds strength to Adani Ports. And we underlined that the regulated business model shields the downside of airport operators, although they face a protracted recovery.

Of course, every recovery has to have a worm or two in the bud. One of them has been a survey by the Pew Research Centre that showed the pandemic had led to a dramatic shrinking of the Indian middle class. That could have serious repercussions for consumption demand. Then there was an RBI paper’s discreet rubbishing of the Economic Survey’s paean to higher fiscal deficits. Add to that another RBI study that found demand had been boosted so far by richer households drawing down the excess savings accumulated during the lockdown, while poorer ones borrowed to meet their expenses. That raises the question: If household savings normalise and go back to pre-pandemic levels, while the fiscal deficit remains elevated, will interest rates go up?

Indeed, the fear of higher interest rates is the other worm in the recovery bud, with Turkey going cuckoo over it. Back home, RBI’s latest state of the economy report warned that growth could be hurt by the bond vigilantes. They threatened to use a Brahmastra against the villains—the threat seems to be working, with the 10-year G-Sec yield falling this week. There seems to be some justification for RBI’s stance, as markets appear to be pricing in interest rate hikes too aggressively.

In spite of a strong recovery, the markets are jittery for a reason—parts of it could well be a bubble. These benchmarks could be useful in negotiating current volatile conditions.

Dylan Grice, acclaimed market strategist, says in an interview to themarket.ch that a little known part of the ‘Roaring Twenties’ was the adoption by the US Fed of famed economist Irving Fisher’s idea that the central bank should focus only on containing consumer price inflation. Grice says it was this single-minded focus on inflation that set the stage for the central bank ignoring all the warning signs of a bubble, which later led to the Wall Street Crash of 1929 and the subsequent Great Depression. We can draw the obvious parallels with today’s environment.

Incidentally, Irving Fisher, unfortunately, is best known for saying stock prices had reached a ‘permanently high plateau’, days before the crash.
Manas Chakravarty
first published: Mar 27, 2021 10:05 am

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