Meltdown: The Volatility of the future and peeping into history

As the markets have been very volatile since last few weeks this looks like a perfect time to write about the changes in the future and the markets as well as the attitudinal changes that will happen to post virus era but as usual I will be starting with my macro economic views about the oil truce and the markets and probable future changes relating to them.

Macroeconomic view

Various governments of various countries have provided bailouts for their citizens either in kind or cash or a mixture of both and even India has provided a bailout for the country in mixture of kind and direct benefit of cash transfers. Even though we have had a stimulus bill, it is very difficult for MSMEs to survive in near short comings of about 6 months in the market without proper liquidity and RBI has taken all the steps it can take. It is not a time to criticize government at this time as it is doing a tremendous job but we must also look into history as in what must be done for the future and what scale is required.

By history I am talking about the steps take by Franklin D. Roosvelt during the depression of 1930 because it is considered a great recovery and also the steps taken by various governments during 2008 financial crisis by providing a stimulus bill as big as 10-15% of the GDP for a steady recovery considering a long term perspective wherein things are taken care for at least a period of 4-5 years.

Market Volatility

The markets have been volatile since past one month and since few weeks the Indian market have been copying USA markets with almost negligible difference as the markets are responding to the future that is there after 2 years from now. It is a general psychology that most humans have a tendency to form a pattern if three or more dots are connected even if there is no similar pattern from the past. 

There has been a comparison been made of the Volatility index which shows that the market is following the same pattern as it happened in 2008 financial crisis and there seems to be another spike in Volatility index when we will be seeing the stock markets crashing again.

 This above image shows the spike in volatility and NIFTY Index performance wherein if someone who doesn't know are inversely related to each other meaning that when the VIX index rises SENSEX/NIFTY shall crash and vice versa.

We need to look at the volatility and make a careful observation and a thought that whether there will be another spike or not? Also the markets have shown positive results and one must understand the main reasons behind it:

• The positive new of the corona virus relating situation as India has the least number of cases per million residents and also that sample testing have been started showing us the signs of relief and the impact of corona virus on green future.
• The stimulus package provided by the government has been a major relief to most of Indians as well as the FM Nirmala Sitharaman will be providing another stimulus package for the industry.
• Subsume of the industry is also a big advantage as the firms will start it's earnings and there wont be a total loss to the firm.

Change in consumer behavior

The main question arises is that will the consumers start following or go back to routine or will they start saving more?

Again I would like to take you to the history if it provides us any guide or future opportunities and clear vision. If we look at the spanish flu of 1918 there have been few lockdowns of similar nature but once the citizens start developing immunity then there wouldn't be a need for complete lockdown for the same but the major concern is how soon will we develop immunity over corona virus. 

The government is trying to have a 'V' shaped recovery after the first phase of lockdown by infusing liquidity in the market so there is more availability of cash and spending is more, but as we are talking about behavior change it seems that the consumers will be saving more and there can be rise in e-commerce expenditure and buying things from there with regards to safety concerns post virus period. Even the millenials will start saving for future uncertainty. It has also been noted that after every crisis there has been a change in attitudinal behaviour. For eg: After WWII there have been a significant increase in working women class which was not there earlier and now I expect increase in e-commerce expenditure by households but again looking at India it is very unlikely to predict regarding online expenditure.

The longer the lock down the harder it will be to gauge consumer behavior, will people go back to their old habits? Will people be more careful and save more? The longer the lock down lasts, more people will lose their jobs leading to decrease in household spending and it will take much longer to return to normal economic activities. There are still few questions remaining and I expect the readers to have a good discussion:

• Will you be happy to work from home?
• Will you be more happy if the children don't go to school and learn from home through online means?
• Will there be a Universal healthcare system for the India?
• Will there be any increase in budget allocation towards health care and education?

Liquidity Preference

There has been a drastic change in liquidity preference of money among-st the Indian households as the investors do not consider stock and bond market as safe investments during the volatile market. Thus, the demand for gold has increased leading to increase in price of gold also. Any uncertainty in future would lead to increase in gold prices as it is considered much safe investment than any other form and also not only because of the safety concerns but also because the stock and bonds have started giving very less returns to the investors.

OPEC truce crisis

After days of drama the OPEC+ countries have been in truce to produce a limited amount of oil as the demand has decreased in the current period in response to corona virus triggered situation, but the deal would likely to come under pressure or changes when the situation turns normal.

But these are times with unprecedented collapse in demand due to virus and I would not be surprised that while there will be increase in demand the countries would be breaking the truce to fight for the market share. As of now Saudi Aramco has offered it's clients of refineries across Asia and European markets to have deferred payments up to 90 days, this move clearly shows that though there is a truce there will be many attempts by the companies to capture good amount of market share.

I would request to provide me your thoughts in the comments section

 

Meltdown: The new normal

There has been a volatile market in the past few weeks with the assumptions from investors that certain things might happen. What you are seeing in the market is not of the current situation but regarding the outcome or the expectations after a year or so that will happen because of the current decisions taken by the government to fight the crisis.

Macroeconomic views
As every government is has tried providing a good stimulus bill to their country to support the citizens residing there, there has been a tremendous bond purchase by the G-7 countries from their respective central banks nearing to $1.4 Trillion which is close to 5 times higher than 2008 financial crisis borrowings.

Even if we look at the Indian scenario the state government are raising funds through bonds and as yet the Reserve bank has not stepped in.

Looking at the current scenario of volatility of the markets we do not still know whether we have touched the bottom or not or have we passed that stage. Being an optimist I expect the markets to grow in a 'V' manner but a 'U' or else 'L' shaped curve is expected considering the position of the COVID-19. Even the experts who are racing to make the vaccines have asked for a time of 15-18 months to make proper vaccine. Still even if the vaccine is made the supply is questionable as well as the population which will be vaccinated will take tremendous amount of time and before that we will have to live in the new normal situation.

It is also likely that we have entered into recession starting from March when the economy started to tumble leaving many problems to MSMEs and corona virus giving it a boost as we see there has been an increment in the unemployment rate and is expected to be at 23% currently and is expected to be more.

The new normal
The new normal after the crisis situation will have social distancing at the most and increase in health measures till the vaccine is not found. The factories may start running but there is a lack of demand as many countries have gone for a lock down and may extend till there is a proper certainty from the healthcare officials. As the daily wage earners have also been migrating there would definitely a shortage of  laborers and the companies wouldn't be sure of the production capacity they may achieve. There is probable threat to the companies in near term as after the lock down is lifted there will be a constant fear among-st the companies of another lock down in case the number of patients goes upwards at an increasing rate.

The strategic change
The companies will be changing their strategies globally and would be looking for local production capacity enhancement as well as multiple countries in order to never stop the business supply chain because of another crisis that might happen in future. Considering such changes the outflow of the cash would be very crucial as spending on non essential things would be stopped immediately and conserve cash for at least 6-7 months till the companies have enough buffer to spend on various things.

Marketing Mix
Marketing companies are likely to be affected because of the lack of demand and also as the companies would not be willing to spend much as the consumers would mostly interested for surviving the corona virus situation as the number of cases are expected to go much higher after the lock down. Thus marketing firms are likely to make a long term strategy and bring out out of the box business models in order to survive in the market. Looking at this situation another 2-3 months would be very crucial for the marketing firms

Labour Problems
Considering many of the companies would now be upgrading technology and would try to automate as much as possible to have less labour problems as it seems that now the labour problem is going to rise since many of the daily wage earners have migrated and bringing them back by giving them advance payments would largely affect the cash outflows. Even the labourers are scared to come to the companies which comes under the essential services in fear of corona virus. This will be there as labour shortage is always there in the market but the fear will only decline with vaccine.

Logistics
There has been volatility in the crude oil market but the current deal between the OPEC+ will certainly stable the oil prices.

This has mostly affected the logistics market as it seems that mostly logistics on railways would be more affected more as there are chances that the prices of roadways may go down with decrease in crude prices leading to a very tough competition and acquiring more consumers to roadways. But there is currently a shortage in supply chain in roadways and is not likely to be met in the crisis time, also as increasing the safety concerns some companies may make it compulsory to have 2 drivers and also if there is a single driver his health is taken care of.

Financials
The financial market is likely to evolve as there will be increase safety in the market as the issue which always remains 'Average Receivables' will still be a big problem. While there is a solution in the export market why haven't there been a similar agencies working upon the domestic market.
For eg: ECGC is there which identifies the limit of the consumer in the other country and also gives the exporters 95% coverage in case of defaults.
Then why haven't the banks joined together to give provide information on how much credit limit should be provided by the suppliers to their customers and also probable risk coverage upto certain percentage by charging regular premiums such as the insurance companies. There can be something as fixing the credit cycle even for those firms who are not Pvt. Ltd just to not enter into the hassles of running a company.

Green Business
The future, as India is moving to sustainable and renewable energy projects this is the certain future and investments in this would also be bringing results atleast 4 times that of the current market. Also we have infrastructure problem which primarily needs to be sorted out before transitioning into the future. As the government wants to have all the cars to be electric by 2035 it is definitely impossible without a sound infrastructure planning of bringing charging stations as well as using the renewable energy other than solar also to use. Since there are no new innovations happened at reducing the cost of using wind as well as water to be used for large masses, there seems likely a future of getting and developing a new business model into each of the area and developing one's own niche.

Currently I have mentioned about few things and would come up with new sectors in the next blog about the new normal that will likely happen post the virus period. 

Back to basics

Since I wrote my last blog I did a social experiment of deleting social media apps and getting away from it, at least for 9 days I did that and realised that I was wasting most of the time on doing useless things and could have utilised that time doing something else. Currently I am on instagram for various reasons other than socialising.

I decided that in this blog we should go back to the basics meaning how the world would start post crisis situation. Again I will be writing about the economy because that is what I can understand things easily.

Macro view
In the previous blog I wrote about investment strategies but this time I would be just giving my views on the probable changes that can happen in the economy. I will be starting with showing how the markets have crashed and the probability of going further down.

Sensex	27590.95	-11032.75	-28.56%
Nifty	8083.80	-3219.50	-28.48%
Nifty Bank	17249.30	-11927.75	-40.88%
Nifty IT	11680.05	-4043.15	-25.71%
BSE Mid Cap	10219.05	-4544.59	-30.78%
BSE 500	10527.29	-4256.30	-28.79%
BSE FMCG	9982.00	-1022.20	-9.29%
BSE IT	11780.88	-3552.92	-23.17%

The above mentioned data shows the indices changes since last 1 month and we can understand that sensex as well as Nifty have crashed 29%, whereas bank Nify has crashed around 41% showing that more than any sector financial services have taken more hit as the assets are under stress because of the lock down and the moratorium provided to the business bringing a major possibility of future NPAs as there seems to be lack of demand post crisis from the consumer. Considering this situation, there is a long term impact as I mentioned in the previous blog that it might take atleast 2 years for the recovery for the economy the decisions by different countries of doing lock down for a longer period assures my claim regarding that and the MSMEs are most likely to be affected until an unless some specific stimulus bill or some new financial reforms are not given by the government.

Survival of the fittest

As the economic conditions prevail there are many possibilities if MSMEs shutting down or will be requiring restructuring from the banks because of the magnitude of shock to the corporate bottom line and the speed at which the things have happened has put new and young companies who are debt burden as well as startups in the risk of probable default and shutting down.

A different version of the economy

Every crisis teaches companies something new and those who survive the crisis will be starting to implement new strategies and policy structures. Since Covid-19, work from home has been very successful in most of the companies as well as in education fraternity making the companies remove some of the unproductive sales offices and making the employees work in remote locations even from home or from co-working space which would save their infrastructure costs as well as rental costs. 

Localisation will start in major countries as since China was under lock down situation most of the big companies faced problems regarding supply chain solutions and keeping up with the pace of the demand. Thus, according to me the companies won't be only thinking of importing from a particular country but keeping multiple options so that business won't stop or be affected as it was in the current situation.

Millennial mindset changes

Millennials are of the mindset of not owning cars or having a house of their own, considering the increase awareness of health and safety there can be shift in demand from sharing economy to owning a vehicle as well as buying a house for long term consideration. This gives a realty check that there might be increase in demand in hatch back cars which are not very expensive also in affordable housing once the crisis gets over as most of the savings of people have been wiped out in the financial as well as health crisis.

Developmental Reforms

Though not definitely any particular type of reforms but as the need of the hour says that there would be financial reforms taking place to save the businesses and get things more streamlined and provide some sort of security to the business owners, also health infrastructure would be taken more seriously and proper development might be taken into consideration by forming a policy and giving incentives to the new businesses in certain essential areas.

But there is still a long way which needs to be passed as we will be surviving for few months and going just back to the basics where we all started.

Investment for post virus periods

Reflecting upon the changes that have occurred in the past one month, I am writing this blog for those investors who are willing to look past short term benefits and assuming most of the consumers would have lost the capacity to invest in long term right now. The markets have been volatile on daily basis but have spiraled down in the last one month and the daily movements are happening on the government announcements as well as the COVID-19 panic the consumers have reflecting their psyche to the market.

Macro economic views

As there were global financial crisis in 2008 most of the stocks the stock market went into a correction but this is a fall and not the correction as precedent-ed by the investors mainly because of uncertainty of the economy starting again in the short term and the investor panic because of the virus situation and increase in number of cases. Looking at the panic situation currently Indian firms have lost around Rs. 20 lakh crore in terms of valuation and even NSE Nifty 50 have tumbled down to 29%.

Sensex	28265.31	-10031.98	-26.20%
Nifty	8253.80	-2947.95	-26.32%
Nifty Bank	18208.35	-10938.80	-37.53%
Nifty IT	12045.85	-3167.10	-20.82%
BSE Mid Cap	10339.98	-4260.04	-29.18%
BSE 500	10728.88	-3898.74	-26.65%
BSE FMCG	9898.67	-1065.17	-9.72%
BSE IT	12126.35	-2860.85	-19.09%

Overall equity markets have tumbled but it started before the virus spread and we see that no markets are considered as safe investments looking at 2008 global financial crisis and current panic situation. The worse is yet to come as the fear that virus will extend the recession and the recovery will be delayed.

Looking at the government stimulus provided as well as the stimulus provided by IMF it will be beneficiary for short term only, the oil is going down and has reached almost $20 per barrel and the rate cut for SSC also most likely will make it around 6% making a shift in consumer markets considering the investors to reshuffle their portfolio.

The damage was also seen in the bond markets

Asia Pacific    10-Year Government Bond
Japan	100.94	+0.0130	-0.0090
Hong Kong	114.90	+0.7780	-0.0020
India	102.22	+6.1380	-0.0710
Australia	117.81	+0.6780	-0.0850

Sectoral View

Energy remains the worst hit sector followed by financial services and real estate. Though there are exceptions such as Adani Green whose market cap multiplies 4x in the last six months and is not affected that much and similar other companies.The industries that seem to be worst hit are infrastructure companies that have debt.

Past the crisis 

There can be no denial that the economy will not move into recession since the commercial activities of the business has almost stopped and post lock down businesses still suffer accounts receivables problem and also that most MSMEs do not have any security for losses in A/Rs mostly applicable in B2B businesses.

There will still be the uncertainty in how much time the markets will start to recover. If the situation starts getting better I expect the market to again start correcting itself within next 2 financial years and considering a growth in demand in India if the government starts building infrastructure projects and makes payments on time.

Investing in post virus period

There are 3 strategies in which the investors must look upon

• The investor must look upon those companies which have lost nearly 50% of the market cap in the crisis period but have strong fundamentals and a proper operating margin increasing the bottom line. There must be increase in sales volume and not increase in revenue because if inflationary prices and also a low debt company which would be strong enough to sustain in times like this.
• Having a look at distressed equity such as the airline sector, they would definitely perform as the economy tends to perform and things get normal but there are chances that they may incur losses but in such cases there is a blessing that the government may bailout the company such as few of the banks which were merged.
• Another strategy is to go more safer wherein the company has low debt to equity ratio and has high cash balance such and will remain in business for at least 20 years from now on and have also performed better in pre-virus period.

In my view the economy will recover but it will take more than a year and few structural and policy changes to support and boost the businesses.