Depression or Recession: Where are we headed?
28th, March 2020 - Startup Event
In the wake of the Covid-19 pandemic, the government has implemented a number of measures to keep the economy afloat. The RBI has cut Repo Rate by 75 bps to 4.4%, while the central government has pledged to inject 1.7 lakh crores into the system to maintain liquidity levels. Despite such measures, the sluggish markets depict a different picture. The equity markets seem to be in a firm bear grip, as it struggles to react to the spread of the virus and the precautionary measures put in place to combat it. The 21-day lockdown period announced has created a dilemma, in minds of some, with regard to the economic repercussions of the move.
This reflects the anxiety and uncertainty around the real economic costs that households and businesses would have to bear. In the light of recent events, Moody’s have slashed India’s GDP forecast from 5.3% to 2.5%, while the GDP growth of India was 4.7% in Q3 2019-20. Is the economic depression intensifying into a recession?
We, at Zeva Astras, being into private wealth management, it becomes more important for us to analyze these developments. We believe that the current situation is a health crisis and has taken the shape of a financial crisis, as witnessed by the Indian economy in 1992 (Harshad Mehta Scam), 2001 (DotCom Bubble Burst) or 2008 (Debt Crisis). It is a ‘black swan’ event, the uncertainty among the investors is majorly due to the unavailability of ‘guides’ which provide reference points to the markets.
Over the past few months, the trajectory of the markets was not promising. But, with the emergence of Coronavirus, the markets have taken a nosedive. Indian markets have fallen hard in the last month. What has been devastating is not just the extent but also the pace of the correction – a sell-off of 35% in 20 days. The fall can be attributed to the ETF (Exchange Traded Fund) activities. The past weeks have witnessed a spike in selling from global funds – especially ETFs. A lot of the flows into and out of the ETFs tend to drive by “dumb money” (algos/machines – trying to play the big macro trends across markets without differentiating between stocks).
Foreign institutional investors (FIIs) continued to dump Indian shares. In March alone, they have sold domestic equities worth $7.04 billion, and $7.02 billion in debt instruments. Analysts fear that the lack of a fiscal stimulus package from the Indian government may lead to more sell-offs by FIIs as central banks and governments in other countries have stemmed up measures to cushion the economic impact of the pandemic.
In such a backdrop, India imposed a three-week-long nationwide lockdown, which by far is the most far-reaching measure undertaken by any government to combat the spread of the Coronavirus pandemic. However, the lockdown might have long term impacts on the ‘mood’ of the financial markets. Certain businesses have temporarily closed leading to a spike in the unemployment levels. Thus, it would lead to a fall in income and the domestic demand making capacity. Consequently, the stress on the financial market is furthered.
The severe compression in demand over the next two to four months will have a negative impact on the economy and the GDP. The extensive loss of income for businesses and individuals across countries will have a multiplier effect throughout the economy.
With sectors like hotels, travel, tourism, manufacturing, and services taken a hit the depression is intensifying. Moreover, with the downscaling of operations are affecting the productivity of different sectors. This makes the markets more volatile, resulting in huge cash and wealth erosion from the system. The nation would take a longer time to recover from the situation.
The scenario is also going to affect the start-up ecosystem, especially those who were planning to go public through IPO’s. With the downward trend depicted by the markets, both nationally and globally, the start-ups are more likely to take a conservative approach.
During the span of the week Finance Minister of India, Nirmala Sitharaman, has announced a number of steps to help the citizenry and at the same time maintain the liquidity levels in the market. Furthermore, RBI has decided to cut Repo Rates. However, additional liquidity may not help growth while the shutdown destroys demand, it will help businesses to survive and help recovery once the situation normalizes.
In the recent scenario, it can be presumed that the fiscal stimulus has by far been unable to build investor confidence in the markets.
Sensex and Nifty remain volatile. The depression, of sorts, that was being witnessed in the last quarters is emboldening into a recession.
Given the developments, investors need to be judicious with their money. The investments need to be made based on strong analytical analysis rather than speculation. It’s pertinent to rely on technology to strive ahead when the markets start moving upwards.
(Disclaimer - This document represents the views of Zeva Astras and must not be taken as the basis for an investment decision. Neither Zeva Astras nor its Directors or associates shall be liable for any damages including lost revenue or lost profits that may arise from the use of the information contained herein. No representation or warranty is made as to the accuracy, completeness or fairness of the information and opinions contained herein. The material is prepared for general communication and should not be treated as a research report.)
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Basavaraj Puttappa - CEO Zeva Astras
Basavaraj Puttappa has over 16 years’ experience in the financial investment sector. Before co-envisaging Zeva Astras he has been associated with prominent financial organizations like Motilal Oswal, Anandrathi and Reliance Capital. Driven by ambition and dedication he has created a niche for himself in the market as well as among team members. His expertise in portfolio management, wealth management, and family offices makes him an indispensable aspect of the organization.