Adroit PMS Dec'20 Newsletter - All crisis are opportunities, coronavirus was no different in 2020

[Note : Below is the snippet of the newsletter posted to clients earlier in the month. Some of the statements are forward looking, the impact of which may or may not be the same as of today. No statement in this should be construed as investment advice. Equity investing is risky, kindly consider an investment advisor before taking any positions. Adroit PMS employees and author may have positions in the stocks mentioned in the post. Any stock discussed is for general discussion and illustration purposes only]

Vladimir Ilyich Lenin―a Russian revolutionary, politician, and political theorist―once quipped that “there are decades when nothing happens, and then there are weeks when decades happen.” That’s what we think 2020 was in a nutshell.

History repeats itself...

If we analyze past market behavior we can draw an analogy to period of 2008-09 post the global financial crisis. At that time there was simultaneous effort by central banks of all major economies to provide support to their respective economies through rampant expansionary policies. Balance sheets of all major central banks like US FED, BOE, BOJ expanded many-fold. Though traditional economist always pointed towards negative impacts of such expansionary policies but in the end over last many years these policies did stabilize global economy.

Pre-Covid many of these big economies were on path of recovery. As soon as the Covid hit all these countries sprung into action with unprecedented alacrity. Taking cues from 2008-09, this time too, the central bankers immediately pressed panic button & came into action. Within couple of months US government announced unprecedented stimulus package of USD 3trn. The US FED also loosened its purse & maintained highly proactive & market friendly communication strategy. In every communication they kept reinforcing US FED will not let cash crunch come into way of people’s day to day life. The unprecedented flush of dollars along with confidence that more will be done if required resulted in strong push to equity & commodity markets exactly the same way as it had happened in 2009.

The V-shaped recovery...

The year 2020 has been a period of extremes for markets. During past 12months, the equity markets have kept swinging between extreme fear and greed. The year began on a buoyant note. The benchmark indices scaled their all-time high levels on 24 January, after rallying for past 4 months. In the following 2 months the indices corrected ~40% from their January highs, refreshing the fading memories of 2008 crash. A sustained rally thereafter saw the benchmark indices scaling new highs in next 9 months. This rally was remarkably different from September 2019-January 2020 rally in terms of volumes, market breadth, and participation. Foreign investors and domestic household investor have been notable buyers in 2020 rally, while the domestic institutions have been net sellers.

There has been a large rerating in a relatively short span of time and hence caution is warranted. This has been fuelled by Covid cases/fears coming down, economic activity sharply bouncing back to pre-Covid levels, positive news flow on vaccines, strong 2Q earnings led by cost management and global QE/weak USD support which has resulted in massive FPI inflows into India. At ~20x FY22E (which is premised on superlative earnings growth in FY22E), the market does look optically elevated and hence one must remain cognizant of fundamentals. Continued liquidity could keep the market levels elevated but liquidity is a tough variable to model. Globally, India remains in sync with the rest of the world and hence a global liquidity remains a key risk to current valuations. 

Hope and Anticipation of Victory over C19 but challenges remain...

There is hope and anticipation of victory over pandemic and life returning to normal in 2021. Each piece of improvement in the economic data and healthcare statistics brings relief and stokes optimism. The wealth effect created due to higher asset prices is comforting people in more than one ways. The technological advancement and digitalization has made tremendous progress in past 12 months. The global effort towards climate change appears more promising than ever.

There is fear of new variants of Covid-19 virus disrupting the recovery effort and bringing the life to a standstill gain. There is widespread distress caused by the health and economic shock of pandemic. The people in numerous countries are unrestful as they resist increased state surveillance and struggle to manage numerous uncertainties confronting them. A massive leap in socio-economic inequalities is threatening to undermine the poverty alleviation efforts made in past three decades (since end of the cold war, liberation of East Europe, and economic liberalization in India, China & many other populous countries).

There is great deal of uncertainty as to the shape of the global order that would emerge from the shadow of the pandemic. How will Brexit impact the Europe? What would be the impact of a prolonged Sino-US cold war? What will be the end game for the profligate monetary and fiscal policies adopted by most states? How the normalcy will be restored in global monetary system? Will the supremacy of USD be finally challenged? Will neutral currencies (crypto or something else) become universally acceptable, or we will have cold war like trade blocks with their own respective dominating currency (for example, USD & EUR for one block; CNY for another block; and gold for the non-aligned)? Will the international borders closed to check the pandemic ever open fully? How many of the present businesses and industries will become redundant in post Covid-19 era?

The vaccine implementation begins, inequality rises.

Notwithstanding the all-time high levels of stock market indices in most countries; the global financial system inundated with trillions of dollars in free liquidity; over US$20trn worth of bonds yielding negative return globally; the massive economic and social shock of Covid-19 pandemic has left billions of people in distress. The inequalities of income, wealth and opportunities have risen to new highs.

Significant developments have been reported on the front of vaccine development to check the spread of Covid-19 virus. Many countries have already authorized emergency use of some vaccines; and people are being administered such authorized vaccines. Nonetheless, recently a fresh wave of mutated version of Covid-19 virus has been reported from some places in Europe (especially UK), resulting in fresh set of mobility restrictions. This indicates towards the possibility that the world may not return to total normalcy in many months to come. As per various estimates, it will take 15-18months to inoculate a sizeable population to reach a stage of herd immunity against the Covid-19 virus.

How to position yourself for 2021?

The post pandemic recovery theme has played out well as markets saw renewed interest for domestic equities from all market participants including FPI’s, and portfolio investors. Earnings have exceeded investor beaten down expectations post pandemic and we believe markets are poised to remain positive sans Covid. Loose monetary policy and positive current account balances are key positives for the economic recovery. Finally, we are seeing the transmission of interest rates happening into various segments. If these trends persist, they can possibly drive growth in various segment of economy such housing, investments etc.

We have seen surprises in company performance right from exports (IT, Pharma) to financials (Asset quality), to domestic consumption (Autos etc). While we believe vaccines are on anvil and governments are chalking out large-scale inoculation drives, the risk of a delay in vaccination persists. Our portfolio stance has turned optimistic as we play the recovery theme through quality. The caveat however remains that markets are volatile. This volatility is best served by staying invested rather than trying to time the markets. The longer term outlook for equities continues to remain intact. Short term volatility can be used by investors to top up their existing investments with a long term view.

You can access previous newsletters here

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