Shift in strategy

 

Record-breaking quarterly numbers might remain history as the next challenge will not be demand but inventory management

 

The liquidity-pumped euphoria is showing signs of wearing out. The best-ever revenues, volumes, and profit in the March 2021 quarter produced by many companies are not generating the enthusiasm unleashed end of last calendar year. The market was flat in the past month to 7 May 2021. The benchmark had rebounded from the March 2020 multi-year low of 7,610 points, buoyed by RIL’s Rs 2-lakh-crore fund-raising through 33% stake-sale of Jio Platforms in less than two months from end April and a rights issue thereafter. After stabilizing at the 11,600 level for three months from August 2020, the Nifty shot up 30% in the subsequent four months to touch a lifetime high mid-February 2021. HDFC Bank, a proxy for economic health, surged 41% in the period. Bajaj Auto, capturing discretionary spend, gained 34%. Grasim, symbolizing industry consumption, advanced 64%.  Hindalco, a play on the private and public investment mood, improved 75%. Tata Steel, pointing to infrastructure capex, surged 66%. The tailwinds were the signs of spring in the June 2020 quarter results, which started trickling mid-July, after a 21-day nationwide lockdown from 25 March 2020 had knocked down Q4 of FY 2020 earnings. The catalyst was expectation of a better Q2 due to a normal southwest monsoon and festive spending in Q3. The second US$900-billion stimulus from the US end December 2020 put more cash with overseas investors.

The benchmark shed 2% in little less than the past three months despite a third fiscal stimulus of US$1.9 trillion by the US in March. HDFC Bank tumbled 31% and Bajaj Auto lost about 6%, reflecting the setbacks to the banking and automobile sectors. The Supreme Court end March 2021 lifting the moratorium on servicing loans from September 2020 triggered fears of  ballooning of advances turning sour as Indian states enforce region-specific shutdowns. HDFC Bank’s gross non-performing assets were up in Q4 over Q3 and over the year. Two-wheeler makers froze assembly lines as chips became scarce. Profit-booking from pharma, automobiles, and tech counters, the recipients of attention as public transport was curtailed to cap the spread of the pandemic, is making way to commodities, which will be at the forefront to benefit from normalcy, and because of a soft dollar. Grasim returned 17%, Hindalco 26%, and Tata Steel 63% over the past quarter till the first week of May. There are three messages that the market is giving. First is the doubt about the sustainability of current valuations. The outbreak and retreat of the virus is uneven across the world. The US and some parts of the EU are emerging from the emergency for the third time. India is facing a second surge. A fourth wave has overwhelmed Japan’s healthcare system. The Nikkei index tanked 3% on 11 May 2021. Travel restrictions enforced to isolate countries engulfed in the flare-up will worsen the disruptions in distribution. The second outcome is economies getting caught in the crossfire of uncoiling prices and fragile recovery. Stimulus packages have improved consumption but not employment as enterprises focus on keeping overheads low. US retail selling tag in April jumped to 4.2% over the year and from 2.6% in March. The rate was the highest since CY 2008. On the other hand, the number of unemployed is not dipping to show return of routine. Businesses are unable to cope with the release of pent-up demand due to difficulty in procuring raw materials.

The Federal Reserve wants 2% inflation to be persistent and vacancies to slide to the pre-March 2020 era before beginning to hike the cost of funds. In the meantime, it might start withdrawing from bond-buying to mop up liquidity. The European Central Bank is toying with the idea. India needs continuation of loose money policy as it is projected to see yet another round of higher caseloads. The Reserve Bank of India might be left with little room if there is an acceleration in the outflow of foreign funds, smelling higher yields back home. The third fallout will be volatility in earnings. Q1 of FY 2022 results, while expected to be better than a year-ago, are not likely to be accompanied by pronouncements of record-breaking milestones because of varying degree of impact of localized lockdowns.  The dilemma will be whether to pass on the higher input bill or focus on volumes. Inventory management will become complicated. Supplies tied up during revival will have to be disposed of at a discount if yet another resurgence paralyses economic activity. Investors and companies have never faced such a balancing act.

 

 --Mohan Sule

Making peace with uncertainty

 Investors will have to navigate volatility from localized lockdowns, ample liquidity, and short bull-and-bear phases    

 

One month into FY 2022, it is becoming increasingly clear that investors will have to tailor their strategies by co-opting the pandemic for several reasons. First, the rollout of vaccines from the end of the last calendar year had raised hopes that the outbreak was some months away from weakening. That might not be so. The retreating wave has the nasty habit of coming back by mutating into more lethal variants. The spread and decline of infections are not in synchrony across the world. Even as the UK and the US seem to have gained control over the third surge of late, India is facing a second comeback of coronavirus. Japan is seeing a renewal. Companies will have to prepared for supply chain distribution for a long time. Second, the campaign to blunt the medical emergency is not running smooth. Two provisional candidates were briefly suspended by the US and EU regulators post-administration complications despite the affected being a tiny fraction of the total sample. Eventually investigations ruled that the protection offered outweighed any possible deviancy. An opposition campaign in India criticized the rush to introduce a home-made vaccine, citing lack of clarity on the outcome of phase 3 trials. The concerns proved shallow as subsequent studies pronounced not only its efficiency but also its potency to fight newer strains. As such, a return to the pre-covid-19 job level will have to wait. Third, the coverage is not consistent. The UK had vaccinated most of those above 50 years, the most vulnerable group, by 15 April. In the US, 40% of the population has received at least one jab. With hardly any major incident of late, the Chinese seem to be in no hurry to get a security cover. India has become the fastest country to inject more than 14 crore people above 45 years in about three months. Region-specific travel bans will have to be in force till confidence returns that airlines are not ferrying potential virus carriers.

The fourth cause of uneasiness is the volatility in economy data and equity market indices imparted by the rise and fall of new infections and the pace of immunization. Even as the US is opening and the UK is gradually coming out of its three-month lockdown, some EU members are again tightening restrictions. The varying severity of curfews enforced by different Indian states to tame the latest fury will lead to uneven factory and services output and GST collections. Investors moving their cash and holdings as per the standard five- to seven-year bullish and bearish cycles might be unable to take a long-term view on any sector. If tech stocks go up on travel advise to stay away from hotspots, crude cools down but so does activity in oil producing countries that are markets for a host of goods and services. The fifth concern is the recklessness seeping into bets on the unstated understanding among participants that a market meltdown like that on 23 March 2020 is unlikely. If at all there is bleeding, it will be quickly staunched by fresh support packages. Liquidity pumping, incentives and cheap assistance looking for value are propelling the unlikeliest of stocks into stars at the first hint of turning of the corner. IPOs are sold for rich valuations. Prices in the secondary market run ahead of earnings, anticipating return to the pre-covid-19 era, despite uncertainty when that will happen.

 

The sixth outcome is the weakening of time-tested linkages guiding investors. Foreign portfolio investors and domestic institutional investors, who should behave in tandem, are staking out contrary positions. The mystery is if overseas funds are withdrawing due to the country’s isolation on the international map following the release of a new outbreak or on expectation of higher interest rates back home.  There is also no clarity if the net buying by mutual funds over the last couple of months is because of correction or on easing of redemption pressure. What is becoming clear is that the world is no longer flat. The US and China are rebounding even as many countries in Europe, Asia, and Africa continue to struggle. The seventh fallout is the increasing flow of cash infusion from governments into an alternative swap system that runs on sentiments rather than demand and supply. Already a legal tender in Japan, EV maker Tesla, some major corporations in the US and Singapore have embraced digital currency. Russia, China, and India are going to come out with their own versions. A trading platform for cyber currencies recently got listed at euphoric discounting. So far as transactions remained on the fringes, the parallel universe could be ignored. The Old Economy's acceptance of the new reality is a complication. Central banks can crack down on a market without rules to insulate the real world or shepherd its transition to the mainstream to control the narrative.

--Mohan Sule