I agree with you 100%. These are tough times. These are extraordinary times and we must respond extraordinarily.
What could be that extraordinary, out-of-the-box idea because the US Senate has passed a package which could be classified as “we will do whatever it takes” kind of package. Do you think on the economy front something like that needs to come? This is not the time to skimp?
Undoubtedly, we have taken the absolutely vital step of locking down the entire country. The number of patients in India are far lower than the number of deaths in many countries like Italy. Now, if we can take such an important decision to safeguard our lives, the next priority should be to safeguard the livelihoods.
Compared to the rest of the world, there are some opportunities. For example, we have room to cut down interest rates. In the US, interest rates have been cut by 100% on base of 1.58%. In the UK, on a base of 75 bps, they cut interest rates by 65 bps. Clearly there is a need to cut interest rate massively.
Second, we have seen intervention by US Fed as well as other central banks to stabilize the market. In the initial stages, the US Fed announced intervention in the bond market by $500 billion and mortgage backed security by $200 billion. Then they went for trillion dollar commercial papers and as that is not proving to be adequate, now they are saying it is unlimited intervention, considering how the market behaves.
We need to intervene not only in the government securities market which RBI has already begun. First, they talked about Rs 10,000 crore OMO, then Rs 30,000-crore OMO, then Rs 1 lakh crore variable repo option. Now they need to move to intervene in the Commercial Papers (CP) markets, Certification of deposit (CD) market as well as the PSU bond market. Clearly, they need to ensure that the market is stable and is not in panic mode.
If you take early action, then it calms down the market and the panic does not spread. When panic spreads and you take action, then you have to do heavy lifting.
The third thing is related to providing for weaker section of the society. A 21-day lockdown is going to impact their livelihood, their incomes and their ability to survive. We must do everything needed to support them.
Fourth, the needs of the businesses need to be tackled. Clearly, they are cooperating to end this epidemic by forcing a 21-day shutdown. But the same support should be provided to them on a reciprocal basis so that the moratoriums, EMIs, loan installments and interest payments are taken care of.
Yesterday, the finance minister announced a host of steps to ensure that on the compliance side, enough time is given to people to comply. We need to move to the financial side and she did talk about launching a financial package to support the businesses.
In short, we need to do what we did in the early to mid 90s in Surat when we were hit by a plague. The citizens, the government, the state and local governments all came together to eradicate plague from Surat. Now all Indians have to eradicate Coronavirus from India.
Second, we have to adopt the 2008 spirit. In the 2008 global subprime crisis, India suffered but we could overcome that through quick responses from the regulator, from the government and from the market participants. If we copy the Surat model and the 2008 responses on a much broader basis, we should be able to overcome the current challenges.
The question is how much is enough? The US Fed has said whatever it takes; they have opened their coffers like a running tap to try and rescue the economy. For Indian retailers, it is a grim situation. Same is the case with the cement players. How much will it take from the government’s end and how much can the government really do to buffer up the hit that the economy is taking because of this lockdown?
These are very, very challenging times. We have not seen such a thing on a larger basis. The only lockdown experience we have is going back to the mid 90s and see how businessmen spoke about it. We need a mindset change. A positive mindset is necessary. If you just do a thumb rule calculation, there will be 21-day lockdown and you just round it off by nine days to 30 days.
If we function on a yearly basis what kind of growth we are going to generate? By shutting down our businesses for about 30 days we will be generating 91.5% of growth. Now 8.5% drop is dramatic but this is not permanent damage to demand. For example, if you are going to buy a car in April, you are going to defer it to probably June, July, August; but it is not going to be cancelled. At the same time, a person who was going to buy a car in June, July, August, may continue to buy at the expected time.
There are certain sectors where cancelation of demand is a permanent damage. For example, if you are going to watch a movie today or going to eat in a restaurant today, you have to defer that. You are not going to go more to restaurants in June, July, August to compensate for a drop in April and March. Clearly, this is the time where we just have to take all the necessary steps without looking at the fiscal constraints. Let us just stabilise things and then we can figure out how to scale it back.
Howard Marks in his latest note to his clients is saying that he believes this is a good time to invest and we are at the bottom of the pessimism. Are you getting those feelers from the equity prices? Are we at the bottom or do you think this is an unprecedented situation and this is going to have a long lasting impact even on equities?
I do not think it is going to have a long lasting impact. A month in the cycle of decades and in centuries for a country or a corporate is not going to have a long lasting effect. More importantly, today the market is discounting the near term uncertainty of the complete shutdown. But the same market, a month down the line, will also be discounting steps taking by the government to support growth.
So their sentiments could change significantly even though fundamentals will take more time to change. As Howard Mark sais, it is a great time to buy but the only caveat I want to add is we do not know where the bottom is. In times like this, it is always impossible to predict the bottom. So yes, these are attractive levels to invest into, levels that one should be overweight equity. But please still do not go lumpsum into the market because markets could be volatile in the near term.
Take every correction as an opportunity to invest is the learning we had got from the 2008 subprime crisis. In those days, after the Sensex corrected from 21000 to 15000, it was a good time to buy. At 12000, we felt the same way. At 10,000 also we felt the same way and also at 8,000. We only knew that 8,000 was a much better time to buy than what we were buying at 10,000 and 12000. But we did not know whether 12,000, 10,000 or 8000 was the bottom. So, do not try to time the market. Take advantage of the current valuations and volatility; keep increasing your risk exposure to equity in tranches, on a systematic transfer basis.
If you are buying, where would you look? Would it be about withstanding pressure now or would it be with an eye to the recovery — names like financials and stay away from industrials?
We are looking at companies from a valuation point of view and more importantly their ability to survive the downturn with limited damage. One theme which I can summarise is that the big are going to become bigger and bigger and there will be flight to safety and quality.
In this downturn, companies which have cash on their balance sheets, have a better opportunity to survive than companies which are leveraged. So our focus is a) valuation and, b)the survivability and ability to participate in recovery as and when it comes; c)quality and safety. Big becoming bigger is something which you will see across our portfolios.