Last one month has magnified what we have felt for a long time: there has never been a wider divergence between the real world and the markets. India is grappling to keep the bottom 30% of its population away from dying of hunger. Our national unemployment rates are peaking at 25%. Still, the markets are up 25%!!
This contrast between the real world and the markets often disillusions us and is tougher behaviourly than anything else we see/read. It reminds us of a quote from the movie “Big Short”:
“This business kills the part of life that is essential, the part that has nothing to do with business”
…And the more you stay out of this bubble and gaze at the real world (read essential), the greater are the odds that you will end up questioning what is so wrong.
We think, markets and desktop warriors hate to think about bad things happening so they always underestimate their likelihood. Indian markets are underestimating the impact of the lockdown on peoples income and their purchasing power. They are busy making the V, U and W shaped recovery. Just read a report from UBS that showed a V shaped rebound !!
While we are no better at guessing the alphabets that best represent the rebound (if at all), we know from the past data that the recovery is going to be slow. We will try to capture this through a series of charts and sum up with our investment strategy:
GDP Growth Vs PE of the BSE 500 index
Source: BSE and RBI
Our GDP growth for the next year will be closers to zero, which side of it is anyone’s guess.
Markets typically have a lag in response to GDP growth data. Maybe starts reflecting in company performance with a time lag.
GDP bounce-back is gradual, albeit 2008–09, where it was more global and less an Indian crisis.
If India’s real GDP is going to grow between -3% to +1%, markets haven’t yet corrected to factor this in.
If PE is a real reflection of the future earnings, it shld be between 12-15x for the benchmark index than at 18–19x now !!
Unemployment likely to skyrocket
Source: CEIC
We are inching towards 25% unemployment rate. As a reference, we were at 9–10% unemployment rate during demonetization.
From what we know, startups/MNCs have either slashed salaries or are cutting their manpower.
Travel, hospitality, real estate, infra and small scale manufacturing, which employ a large part of the labor force, are dented for at least 6–9 months.
IT and tech companies are preponing their automation drives as this is the right time to fire without giving much justification.
Household debt as a share of income continues to rise
Source: RBI
What we are staring at is a customer who typically:
Has financed his personal expenditure through short term debt, largely due to easy access and the lure of zero cost EMI.
Has financed his/her her home, which has depreciated in value by 20–25% over the same period. Likely to depreciate more in the future.
Hasn’t seen his income grow as much as his expenses.
Refer chart below, both overall consumption loans and in-particular credit card outstandings have grown at 20% and 23% respectively between 2012–2020. During the same period, personal income has grown at a CAGR of 11%.
Source: RBI
Consumers economic and employment sentiment is at an all time low
Consumer sentiment on economic situation, Source : RBI
Consumer sentiment on employment , Source : RBI
How does this translate into investment recommendations for the next 12 months:
Stay in cash and debt instruments if you don’t understand what is happening.
Have said this earlier too: personal fin companies will see headwinds. Expensive multiples are a trap and carry an illusion of growth. Will stay away from pure-play personal fin businesses.
Stay away from consumer stories where expenditure can be postponed or can be replaced by lower cost substitutes: ACs, brown goods, Auto.
Consumer businesses that have utilitarian consumption demand such as staples, education, healthcare, gas, communication are more predictable and secular. Demand has held well in these segments.
Businesses that have heath/wellness as demand drivers are interesting at a reasonable price. Look for: OTC consumer businesses, health/general insurance, domestic pharma.
With an average per user data consumption growing 10x in the last 4 years, keen to look at businesses that are riding the communication/data consumption story. Eg: OTTs, internet infrastructure, hardware/software, digital brokers, banks that are using digital interface well to get customers.
Companies will de-risk marginal supply away from China. Will be interesting to look at speciality chemical companies. However, we acknowledge that these companies already trade at FMCG type multiples.