Opportunities in crisis

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The Covid-19 global tragedy continues unabated. In terms of global spread, the human toll it has taken, the scare it has triggered and devastating impact on the global economy, this is indeed unprecedented. Also, this crisis has caused total uncertainty landing experts in various fields ranging from biology and medicine to economics, in confusion in providing the right kind of advice. The situation is dynamic. We don’t know how this will end and how long will it take for economies to recover.

One thing is certain: The global economy will take a big hit in 2020. IMF gas projected the global economy to contract by 3 percent in 2020. The more relevant question is: How much and what kind of recovery can we expect in 2021? IMF says that the global economy can rebound with a sharp 5.8 percent growth in 2021. This projection is based on the assumption that the pandemic will peak this quarter and then start fading facilitating resumption of economic activity by June. There are pessimists who fear a second wave of attack crippling life and economic activity further.

If the IMF’s projection comes true, there will be a ‘V’ shaped recovery in markets and a ‘U’ shaped recovery in global economy. On the other hand, if the virus lingers for an extended period of time, or worse, if there is a second wave, the global economy will slip into an elongated ‘L’ shaped trajectory. We can’t rule out anything. Let’s hope that this too shall pass and good times will return.

Every crisis throws up opportunities also. In this market meltdown, we have seen some sectors emerge strong and resilient. Pharma, health care, telecom, and FMCG have exhibited strength and financials have turned weak. Pharma will do very well in this quarter but its out-performance need not sustain if the virus is contained. Of course, some segments like CRAMS (Contract Research And Manufacturing Services) will continue to do well since spending in this segment will continue to rise, going forward. FMCG will continue to be a safe segment but can be impacted by the potential dip in aggregate demand from a struggling economy. Telecom appears to be on a strong wicket. IT provides a place to hide. Paints and adhesives will witness margin expansion due to crash in input prices.

Financials provide opportunities but are fraught with risk. Loan repayments will be impacted and NPAs will rise. But the best names in the industry may come out of this crisis with renewed strength and much higher profitability. Strong banks can borrow at 4.4 percent (repo rate) and lend at around 7.6 percent to bluechip clients making a clean margin of around 3 percent, in the process. This is a big opportunity. Prospects for niche segments like gold-loan companies look bright.

The situation is highly dynamic. Investment decisions too must be dynamic. Experts are better at this. Rely on mutual funds to do a good job in this dynamic world.

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