Motilal Oswal Asset Management Company Ltd. (MOAMC) is a public limited company incorporated under the Companies Act, 1956 on November 14, 2008, having its Registered Office at 10th Floor, Motilal Oswal Tower, Rahimtullah Sayani Road, Opposite Parel ST Depot, Prabhadevi, Mumbai - 400025.
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When the dust settles…

Blog Blog Details
  • May 14, 2020
  • Mr. Aashish Somaiyaa|
  • MD & CEO
For those who spend a lot of time trying to understand how the markets work, seemingly there is something ironic that played out in the last few weeks. After making a peak near 12,430 on January 20, 2020, we again saw over 12,300 around February 12th, 2020, we were still over 11,300 till March 5th and then suddenly we saw a low of 7,583 on March 23rd, 2020. A collapse of about 40% from the peak in a matter of few weeks. And of course all of this attributed to the panic in global markets created by the COVID19 pandemic.

But by March 23rd, 2020 our lockdown hadn’t even commenced and we had barely 500 cases of COVID19 infection and negligible fatalities. 

In fact after the lockdown started and COVID19 became a serious issue in India, we have seen markets stage a very sharp rally of about 22% from the bottom. In my blog dated March 19th, 2020 which appeared in our factsheet for the April month the only request that I made was to say that even if one doesn’t take advantage of this panic the least one should do is not to panic themselves, stay calm and remain invested!

That anyway is not the main point of this writing, what is odd is that before even we had a lockdown and before COVID19 became a serious issue in India we were 40% down and after the lockdown was enforced and COVID19 became a serious issue we are up 22%!

Clearly, this can’t be about India. 

The chart presented herewith clearly shows that in 2008, irrespective of which country you were in, every market fell 50-60% and in 2020 irrespective of whether you are Korea or Taiwan which has some control on the virus, or you are Europe or USA which is seemingly out of control or your are India which is not as good as Korea and Taiwan but certainly not as out of control as USA and Europe, it doesn’t matter; at the lowest point every market was 25-35% down.
Whenever such instances occur it sets us thinking…are we in the right funds, are with the right sectors and stocks, did our advisors give us the right advice? Well, fortunately or unfortunately, depends how you look at it, this is not about your portfolio or mine, this is not about the right sectors or stocks! So the right question is not whether we are in the right fund or portfolio or sector or stocks. Probably the right question is are we on the right planet, in the right asset class?

It’s not like someone woke up one fine morning and decided, India is a bad market, let me sell India. If the global equity markets see a withdrawal of $100bn in March and April it’s not unlikely that we in India would have $8-9bn of withdrawal from our markets.

This very long explanation, is just to tell you:
1. This is not about your portfolio
2. Don’t sell because foreigners are selling

Moving on, the other peculiar thing about such scenario is that in last few weeks I have repeatedly seen and heard a lot of conversations which start or end with describing around how bad is “the situation on the ground right now”. While it is important to monitor this, in the current context it doesn’t help us understand what we will see when the dust settles…because ultimately that is what will help us position portfolios to gain from the upcoming scenario. 

To make it interesting, I sent this phrase to a few people in my team: “When the dust settles…” and invited them to fill in their own hypothesis of what will emerge when the dust settles. I also invited them to write a couple of sentences on why they believe in their hypothesis.

Before you read on, please note these are hypothesis. All hypothesis need to be tested as data plays out and are subject to failure. But the reason for presenting this is that it helps all of us think in the right direction. If all the hypotheses presented below are wrong in your view or proven wrong eventually, the least we would have achieved for now, is to understand that money will be made by hypothesizing about the future and having those hypotheses tested as the data plays out. Money will surely not be made by having endless discussions about “the situation on the ground right now”. 

As they say in my mother tongue: “Bhaav Bhagwaan Chhe”, a.k.a. “It’s already in the price” or for the academically oriented, “Markets are efficient”.


“When the dust settles… high quality and secular growth companies will structurally compound their earnings for longer led by market share gains for the leaders and a robustness as manifested in “The Lindy Effect”. 

“The Lindy Effect” is a theory that the future life expectancy of some non-perishable things like a technology or an idea is proportional to their current age, so that every additional period of survival implies a longer remaining life expectancy. Where the Lindy effect applies, mortality rate decreases with time. Basically, the businesses that survive COVID19 will have the ability to survive a lot more and will be around for that much longer. It’s the equivalent of humans developing immunity to the virus and becoming invincible as far as their business models are concerned. Take example of banks and lenders, even before COVID19 the opportunity for credit creation was big with number of players becoming constricted and now post COVID as the economy needs more credit intensity the number of strong players declines even further to the extent that they can literally pick and choose customers.

“When the dust settles… auto sales will thrive”

There is an expectation that once the lock down is over the hang over of corona will take some time to get over in people’s mind and there would be high degree of consciousness to maintain social distancing or at least to stay away from overly crowded and perceivably unhygienic public transport. The last 3-4 years has seen manifold increase in efficiency of the transport sector with the intervention of Uber, Ola and the likes. In some consumer surveys of the past, it was observed that smartphones and experiences replaced personal mobility in the case of the younger workforce. This CoVID episode should restore personal mobility – be it a two wheeler or a four wheeler back right after Roti, Kapda and Makkan. Choice between Resilience and Efficiency!

This would further lead to people buying cars/two wheelers or multiple cars/two wheelers within the same family with multiple travellers; albeit with some down-trading on the budget. Add to this the fact that multiple factors like floods across the country, credit crunch with NBFCs and resultant liquidity issues, road tax, registration and insurance charges and the long due to BS-VI transition; led to significant postponement of demand happening in the sector.

In case of Passenger Vehicles, replacement demand contributes to about 50% of all demand and the ordinary replacement cycle for vehicles is in vicinity of 4 years. But given the issues over the last 12-15 months this replacement cycle seems to have moved to 5.5 years; which is an indicator of demand postponement and hence pent up demand were things to normalise over time.

“When the dust settles…socializing will move from out of home to within home” or “When the dust settles…home is not just a home”. 

Socializing is a human need since time immemorial and with this pandemic it’s just that the place of socializing for some time might change. Hence, in home socializing and get-togethers will become more common. Further especially in urban areas with the men and women spending couple of months at home, operating all appliances personally there could be case for replacing a few and adding a few appliances over time in addition to the fact the homes will become spots for socializing. With higher reliance on delivered food, food delivery apps and restaurant deliveries like Dominos could become indispensable.

Actually the utility of a home changes forever…it becomes a mini office, it becomes a mini theatre, it becomes a mini entertainment zone, etc…and whoever can afford or organise will make transformation where they need and want to…in that order. 

“When the dust settles… people care about their health and wealth will change forever”

The most important realisation in this pandemic is the importance of both good health and financial health so how a person takes care of it will change forever. From a health point of view, people will be more careful with the lifestyle they are living and hence will become more disciplined. Sectors like life insurance, health insurance and diagnostics could grow more. Also the importance of savings both for individuals and companies hasn’t been felt the way it is being felt in this phase. Hence this could bring about some change in earn and consume attitude of people. Financialization of savings will be a bigger trend than it has been in the years to come.

The anxiety of “what if” has made people realise the importance of adequate and right type of insurance and also the need for maintaining emergency liquid savings. 

“When the dust settles… Commercial real estate will have a hard time and IT companies with come out with innovative solutions”

Corporates will look at tying up with solution providers like co-working spaces; there will be a serious relook at merit of having large scale offices and work-stations vs. working from homes and off-site locations closer home or where business actually happens. Business Continuity Planning processes will teach corporates that Work from Home is a seriously viable option. In fact some office owners might go reverse and look to lease out their office spaces through co-working aggregators. Office sharing in well managed hygienic environment for field or traveling staff apart from working from home could be the new norm and apps could be developed to book work stations in offices by employees like we book meeting rooms in offices now. Thus, it’s possible that commercial real estate space requirement would get cut as most employees will not end up having a permanent space marked out and held up for them. Digital companies and administrative or management agencies focusing on creating applications to manage and share infrastructure could flourish.

When the dust settles.... new leaders will emerge basis strategies that will play off based on financial strengths…there could be flurry of investments in acquiring or building digital capabilities

Once we are out of the lockdown, intellectual property without enough capital will have serious limitations and only those companies which will have enough cash on the balance sheet both from own resources or from credible lending sources (say banking subsidiaries etc.) will not only survive but will thrive, large part of the world will be cash starved and will be looking at repair capital. They may have to bite the bullet of survival at a high cost of capital; both in equity and in debt. In equity they will borrow by discounting from their future potential where they have likely growth and that growth they will sell cheaply to present intruders (or white knights as the text book calls them). 

The ones who have cash on hand will be able to acquire digital capabilities and might be spoilt for choices.

When the dust settles… expect consumer discretionary demand to come back with vengeance. 

Consumers, all this while, would have tried to conserve liquidity given the uncertain environment and lack of positive income catalyst. So as and when the dust settles and consumer sees a semblance of the storm having passed with income certainty restored, she would release the pent-up demand and consume discretionary items (both high and low tickets). So sales of white-goods, jewellery, apparels, watches etc. will make a comeback. 

When the dust settles… Governments will curtail capital expenditures on infrastructure projects

Governments, both at the centre and state level, will realize their coffers are empty given the subdued tax collections with stoppage of economic activities!! So expect governments to curtail some capital expenditures on infrastructure projects. This may have a deleterious impact on the infrastructure ecosystem (direct as well as indirect) and can impact job creation in the medium term.

When the dust settles….some banks will be aggressive in lending”

Banks are flush with funds, credit creation is virtually absent right now and for some parts of the system like the state owned banks except SBI the incremental credit to deposit ratio is barely even 10% and for the whole system altogether it has been steadily declining even as liquidity in the system is very high. The Government with limited ability to stimulate the economy is like to push banks to lend and one can see RBI using moral suasion. The pressure of rising deposits with no lending is evident with all strong banks cutting savings and deposit rates to cut costs. Further, if they do not lend net interest margins will keep falling and optically NPA ratios will rise. This is not going to change in a hurry with rates going to be lower for longer now. Once there is a stability in income and demand, one will see credit taking off as banks have no option but to lend. This is not so much about banks but about the impact of need for banks to lend on all items of consumer discretion that depend on interest rates and availability of credit.

When the dust settles… some retail banks and NBFCs would be cautious in lending

Given increased NPLs from the MSME and individual unsecured loans segment, the system would be clogged with lenders trying to collect after a fairly long moratorium. Corporates who have just deleveraged or have been in trouble due to leverage may want to tread cautiously before they start spending on the expansion. Despite the rates being lower the risk premium in the sector would rise and hence the cost of borrowings may not fall significantly other than the home loan and the large and strong corporate loan segment. There would be enough opportunistic entrepreneurs or promoters or corporates willing to take risk if cheap money is provided.

For some segments like MSME, the risk aversion can change if the government participates in the risk by providing credit guarantees or any other mechanism to share risk and there could would be push from the Government to state owned banks to start writing higher risk on private sector. This is because the Government is not in a position to spend on investments in this cycle due to higher healthcare expenses and subdued revenues.

Hope you find this relevant for a thinking framework going ahead.

The message still stays…avoid panic and remain invested. On the other hand, if you intend to take benefit of the current panic, do not jump in all at one go. Any top up in equity or a rebalance of your asset allocation from debt into equity should be done systematically step by step between now and September 2020.

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