What a week it has been. The markets were already groaning under the impact of the coronavirus (COVID-19) outbreak, made worse by a weak economy and now they have to deal with the collapse of a major bank. It’s no wonder that at one point on March 6 the wheels appeared to be coming off the market. We looked at the rocky road ahead for Yes Bank investors and cogitated on the lessons the bank’s decline and fall holds for us. Yes Bank’s failure has reignited worries about the balance sheet of the Indian financial sector.
The global economy faces a powerful shock from the COVID-19 epidemic, which affects both supply and demand. It’s a no-brainer then that analysts and economists are busy lowering their growth rates for the economy, with the Institute of International Finance cutting its forecast of global GDP growth this year to a piffling 1 percent. The Organisation for Economic Co-operation and Development has revised down its estimate of global growth this year to a mere 2.4 percent, but it also cut its forecast of GDP growth in India in 2020-21 to just 5.1 percent and its 2021-22 forecast to 5.6 percent, a far cry from the dreams of double digit growth we used to have not so long ago. We also looked at a report of the United Nations Conference on Trade and Development (UNCTAD), which gave us some numbers about the impact of the Chinese trade disruption on different countries, including India.
To be sure, data for February for electricity generation and the Composite Purchasing Managers Index for the month show some green shoots, but all that is being ignored at present because of the epidemic.
Nevertheless, there are some encouraging signs -- China is slowly limping back to normalcy. The Chinese authorities on March 6 said that outside of Wuhan, no deaths were reported in the rest of Hubei province. The number of new cases in the rest of the country too is coming down, as China comes back to work. Official sources say 90 percent of state firms are back in business and about half of the small enterprises have resumed work. Coal production and retail sales have picked up. The Chinese government is attempting to cajole people back to work and the only worry is whether that will lead to a second round of infection.
Nor are governments and central banks sitting idle. The Thai government has approved a stimulus package that includes cash handouts, soft loans and tax benefits. The US Federal Reserve made an emergency 50 basis point rate cut this week and the markets are hoping for another 50 basis point cut at the next meeting on March 18 and a further 25 basis point cut in April, taking the Fed Funds rate target down to 25-50 basis points. The rate cut led to a glimmer of hope in the markets for a while, but there’s an underlying worry that central banks may not really be in control, as there is little they can do against a viral epidemic. The rate cuts and the fear in the market have driven down US Treasury yields to all-time lows below 1 percent. The upshot for the rupee: brace for more currency volatility.
Our team of independent research analysts have been on the lookout for value picks amidst the market meltdown, while mapping out the impact of the epidemic on various industries. For instance, we looked at the impact of the Indian government’s restrictions on exports of active pharmaceutical ingredients (APIs) and who gains and who loses from the effect of the COVID-19 outbreak on the oil industry. We drilled down to individual stocks that could capitalise of the opportunities opened up, such as this API play and another pharma company seeing good traction in the formulation business.
During the week, the Supreme Court struck down the Reserve Bank of India's (RBI) ban on cryptocurrencies, which should open up the space for collaboration between the virtual currency (VC) and digital payments businesses.
And of course we recommended the SBI Cards IPO, which sailed through in spite of terrible market conditions, underlining that quality stocks will never go out of favour.
Next week we’ll have the inflation report, which will tell us whether the RBI has the leeway for more rate cuts, which should be good for the markets.
Let’s also hope a bailout for Yes Bank is in place soon.