Worldwide there is a recession. Covid has dampened economic activity and accelerated the shift to Digital by 5 yrs at the least. This year so far saw an uptick initially more on the developed world as work didn’t get impacted. The businesses facilitating the transformation grew and the ones which didn’t adapt to it are not growing as well.
Besides this there are other angles to this puzzle. India GDP nos going by latest piece of data is down by 7.5%.The Credit growth for nonfood credit is up b 5%, no mean feat in a contracted economy. Who are the beneficiaries in this story? Service firms and Mid level enterprises have led the way. There is more recovery in Bharat than India. This is more so as people in Tier3/Tier 4 cities have not feared the pandemic as much as our Urban population.
Online growth has been more particularly in categories like electronics in which companies like Flipkart focus as a super category. This is a core driver of their growth as a business. That said Digital is becoming a core habit as basic as breathing.
Commercial offices if covid continues this way may lose their sheen. Larger companies may not want to look at more expansion especially on the service sector side. Growth Companies would look at structuring a work from home Module for staff going forward. This may result in slow growth on that turf. That said demand for larger houses may pan up as people work from home. This remains to be seen as a trend. Government support on the affordable housing side in terms of tax incentives would help in shaping a decision on this side.
All that taken into account lets crystalgaze into the future and see how things are likely to evolve. There are multiple opportunities in this buffet. Let’s examine them properly
Equity
Markets have gone up and in situations like these technicals is a better indicator of the things in store. At our end we believe India is fairly valued vis-à-vis the rest of the world. Can we grow more? Have we reached the end of the tunnel?
This year and the next credit growth which is at have5% currently will look like higher single digits if not more even after taking into account the fact that insolvencies are not being allowed to be filed till March 2021.The banking system issues by way may NPA’s may see a higher no of firms filing for bankruptcy if they have not already. This is a major issue going forward in the year to come.
NBFC’s recovery is important to be looked at and that will begin with their capital raising plans. At this stage capital raising remains a challenge for many of them as deploying Capital profitably may be difficult. This reality is likely to change in the coming quarter if the vaccine is successful. The top end of the NBFC pack is likely to consider it from April onwards. The recovery is likely to be shaped on the ground as most of the companies in the broader economy rely on NBFC’s for their credit needs.
What kind of growth do we see a year from now?
10-12 percent growth is likely given the recovering state of the economy. As most firms would be looking at 60-70 percent of revenues and minimal profits going forward. The focus on business in a digital way is likely to rise and new business ventures may also be shaped. Stabilization of credit growth is critical to growth.
Given the fact that govt has undertaken labor reforms and no of compliances have come to 4 from 41, this may be more helpful for large-scale manufacturing. This may encourage more FDI going forward. One thing the government needs to consider is the tax rate reduction for companies above 400 crores of turnover. This may happen in Budget2022, a year after this year as recovery efforts are underway and government revenues may take a quarter or two to recover.
Debt funds
We remain cautiously optimistic. Our call on short term funds is still not positive as the Insolvency issues are still underway. Our view in our research group is to look at funds ranging from Money market funds to low duration which is one year paper. Companies are less likely to look at this. There is ample liquidity support by RBI to support this asset class for investors.
Expected returns are likely to be in a range of 6-7 percent for the categories discussed above. The benefit is it is a post tax return if kept for a period of 3 years and more.
Arbitrage Funds
This is the category with an element to surprise. Ideal for situations when we see downside volatility.
As an asset class it has equity taxation.
Is there a risk on principal?
No.
However, returns are not guaranteed. Post tax returns are better in the short term on account of tax treatment.
Gold
Gold is a safe heaven. As things improve post availability of vaccine as normal activity resumes, the prices are likely to be in line with the 100 year average of 3-4 percent.
Alternate assets
In an era of excess liquidity this category may be seen as an underperformer, however it is a good arena to look at from a capital preservation point of view with a return between FD and equity oriented ideas. The only drawback is taxation close to maximum marginal rate, however depending on fund structure it can come down.
That said life happens when we are making other plans. May the force be with us.
