Investing Bites

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