My views: Current state of the World Economy [2 mins read]

COVID-19:

  • Will take 3-4 months to settle down (Base case)
  • Complete lockdown is the key mitigant for the Virus. Proactive measures taken by countries like Singapore able to withstand the storm – Sonner the better
  • Key Indicators to track:
    • Nos. of new cases (Two broad buckets):
      • Western Europe (Spain, France, Germany):
        • Flattening of curve is the key monitorable here before calling out the bottom, these nations were slightly ahead of Italy in terms of Lockdown
      • US & UK
        • Will take much longer as respective Govt.’s are shying away from complete lockdown
          • UK – a) PM & Health Minister tested positive b) Lockdown for 6 months
    • Nos. of deaths & mortality rate

 

Country wise view:

  • China
    • China coming out of trouble, controlled the situation very well and acted extremely fast in mitigating the damage
    • China returning to work, 70-80% factories expected to run at 70-80% utilisation levels by end of the month
    • Suggesting clients to go overweight on China (on account of above two reasons)
    • Risks:
      • Infection coming back once social interactions increases
      • Partial blocking of new arrivals (Students studying in UK and US still flying down to China)
  • Western Europe:
    • Italy – Unfortunate to see the current damage. Recover going to be long
    • Western Europe (Ex- Italy) – Flattening of curve is the most imp. Metric to track – This will be a key triggers before calling it bottom
  • US
    • COVID – Still partial lockdown, will definitely fall in trouble – Recovery in US from the Virus will be >6 months
    • Reasons for relief rally in Stock market – First time, Fed is buying Corporate bonds (AAA rated)
    • Leverage across segments at the peak in US. Some worrisome Levered categories that might go belly up if the crises lasts longer
      • Large junk of Cat B rated bonds are downgrade to Junk – Fed is not buying this piece of leverage
      • Newer categories at record high levels:
        • USD 1 trillion – PE Leveraged buyouts
        • USD 900 mn – Shadow banking/Unsecured Loans
  • India:
    • COVID – Subscribes to the theory of tropical countries will have self sufficient remedy once summers picks up
    • Metrics to track:
      • Flattening of the curve
      • FII flows
    • Valuations – Overall Index has come down to 16-17x p/e from the top of 24x
    • Risks:
      • Asset quality in Banking (Commercial lending piece specially) & NBFCs (Housing, Retail Loans) etc. – Probability of smaller players going out of the business is very high

 

Thoughts on other Macro issues:

  • Oil
    • Current prices are low largely because of lower Manufacturing production globally vs Saudi-Russia trade conflicts
    • Broader trend – No new capex is coming in Oil sector from the refineries due to shift towards Conventional sources of energy
  • Exchange rate: USD vs INR
    • The recent 75bps rate cut + Rising Flows in the Equity & bond markets (Relief rally/early signs of recovery) to provide cushion to INR from further depreciating

Stay Safe!

Cheers – Anuj Khandelwal


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