In this edition of the newsletter, we have covered:

1. Steps to be taken post taking a contingent Insurance life cover.

2. Differences between an accrual debt fund and a duration-based debt fund.

3. NPS Tier I and Tier II accounts

4. Change in IT rules for the current year.

Testing Rate is no of tests on the total country population. Positivity Rate is confirmed cases on tests.

Recovery Rate is recovered cases on total cases. Mortality Rate is death on total cases.

1. The US may appear as having mismanaged the issue based on new on rising cases, however, the country has done testing to the size of 10% of its population, the mortality rate has been coming down, the daily growth rate has also been coming down. Recovery rate has been improving which means lower stress on the hospital infrastructure.

2. India has taken a different route on testing its population. It has only tested 0.60% of its population, however, the positivity rate of 6% should satisfy the low testing rate. The mortality rate has been close to 3%. While the daily growth rate is still high, the recovery rate has been climbing impressively at 58%.

3. Overall, Japan China and Germany have seen recovery rate above 90%, the world is at 54% and has seen a dip in mortality rates to 4.92% (6% on June 1st). Of note is the low positivity rate in most of the countries.

4. With higher recovery rate and falling mortality rate, it looks likely that the virus is dying out, and therefore the need to further lockdowns is quickly receding and this could lead to a speed-up in the global recovery.

Though the Manufacturing PMI (Purchasing Manager’s Index) numbers are still below the 50 mark which separates growth from contraction, the strong rebound, especially in the Euro Zone, give support to the rising growth claims.

Japan, USA and the Euro Area PMI’s given for June and May, other countries for May and April.

1. Global liquidity to continue to last beyond the current pandemic.

2. Many of the European countries have seen high recovery rates despite an early lock-out and are already out of the blocks as can be seen from the rising PMI’s as shown below.

3. India which had one a very stringent lockdown is gradually seeing a recovery from the lows.

Source: Yahoo Finance, 1. Market cap is in USD Billions. 2. 52Wk Low in red colour indicates that the price was reached before COVID start.

1. Companies that are primarily affected by COVID and not due to the lockdown continue to show high price damage

2. Companies that are primarily affected by lockdown and not by COVID showing lesser price damage

3. Tech companies across segments showing minimal price damage

Seatbelts ensure safety and a reduced impact while Good Brakes prevent over-speeding. The former in the case of portfolios is like applying asset allocation rules while the latter is about rebalancing asset allocations which may become misaligned due to inertia and momentum.

What could take the markets further up or put differently, what could keep the markets at the high levels?

A vaccine probably, low rise in cases most likely, along with lower mortality and no more lockdowns. Liquidity as a factor will continue to diminish in contribution as it would have found its way already into where it needs to go. Further increased inflows in any market may mean increased outflows from some other market.

What could take the markets down?

A second wave, or an unending first wave. The former would result in a straight drop especially if there is a subsequent lockdown.

Mixing of all such factors, some positive some negative, would mean markets would remain rangebound till green shoots clearly emerge. In a rangebound market, one gets chances to trim asset allocations on the up and one gets chances to increase asset allocations on the down. This is typically referred to as a constant mix strategy.

1. All these are possibilities of market behaviour till the time, COVID situation is dominant.

2. With high liquidity, low-Interest rates, physical and commodity asset prices in general low, reform continuations, better market share for the organised and listed market players, the post-COVID situation looks bright for India.

3. Beyond COVID, we might see China-related trade and geopolitical issues, even our very near neighbours adopting Made-in-China behaviour. We may also see Trump-Biden contest heating up and uncertainties related to it.

4. Looking ahead, it is not prudent to recommend a single asset class-only strategy. Each asset class in the portfolio vehicle needs to be “seatbelt-ed”. If we agree to that, then we should also realise that whatever % allocations we give to each asset class, their future %’s will be different. If we cannot establish a cause and effect relationship with factors and the asset prices, more importantly with the future asset prices, then it is necessary to apply brakes in advance and rebalance.

The US and the other developed market economies are in a much stronger position for both fiscal and monetary expansion. The best hedge in the markets at large against a second corona outbreak are the US Tech companies because of their ability to continue working offsite and a possible rising demand request for automation solutions from the non-IT Manufacturing and Service Companies.

The Moody’s, Fitch and S&P rating agencies came with rating announcements on India in last one month. Moody’s downgraded India’s rating to Baa3 (lowest investment grade) while maintaining a negative outlook. Fitch downgraded the outlook to negative while maintaining the rating at BBB- (lowest investment grade) and S&P maintained the rating at BBB- and outlook is stable. All three rating agencies give India the lowest investment grade with Moody’s and Fitch at a negative outlook and S&P at a stable outlook. The ratings and the outlook on India by the rating agencies mean that the government cannot go for a generous fiscal expansion and therefore the government spending will be very restrained, and its role will be more like a partner and a facilitator in infra projects.

There is a lot of talk on India benefitting from a possible shift in manufacturing preferences from China to the Rest of the Asian Countries. There is a need to diversify the global supply chains away from China. Besides, a continuing US-China trade war would mean the US supporting other countries to replace part of the Chinese imports to itself. However, ground realities do not provide much optimism.

As per an ET Report, in 2018, China held a 65% share of US imports from low-cost countries in Asia which dropped to 56% by the 4th quarter of 2019. 46% of this reduction was absorbed by Vietnam while a 27% share was taken by Malaysia, and India accounted for only 10%. Almost 50% of exports from Malaysia, Philippines, South Korea and Taiwan are directed to China. China’s Manufacturing Output is almost 10 times of India’s manufacturing output in dollar terms, while the R&D expenses at 3.5% of GDP is much more than India’s at 1.5% of GDP.

While China’s top 3 manufacturing exports are 1. Smartphones (224 Billion USD) 2. Computers/Optical Readers (148 Billion USD) 3. Integrated Circuits (102 Billion USD), India’s top 3 exports are 1. Petroleum Products (42.2 Billion USD) 2. Diamonds (21.9 Billion USD) 3. Pharmaceuticals (14.5 Billion USD)

According to the World Bank Group’s Doing Business 2020 study, India put in place four new business reforms during 2019 and earned a place in among the world’s top ten improvers for the third consecutive year. Despite an overall rank of 63 among countries, India lags its Asian peers like Singapore, Honk Kong, South Korea, Malaysia, Taiwan and Thailand.

While there has been substantial progress, India still lags in areas such as enforcing contracts (163rd), registering property (154th) and starting a business (136th). For registering a property, it still takes 58 days and 7.8% of the property’s value which is longer and at a greater cost than among OECD high-income economies. The World Bank report also mentions the fact that it takes 1,445 days for a company to resolve a commercial dispute which is almost three times the average time in OECD high-income economies.

So even though there is a huge potential market opportunity evolving due to trade differences between US-China, and diversifying measures by major economies, the ensuing economic rewards to India of any significant proportions will happen over some time in future and not immediately.

Click here to download the May Newsletter 2020