The corona virus has been a phenomenon which has made the world’s central banks take notice. These institutions are among the most informed to react on any economic issue.
This is a testing situation from a supply side point of view as China is the world’s factory and has the capacity to roll out products at scale to markets globally. So what is the impact?
The prices of goods are likely to rise 5-10% more depending on the category whether it is electronics or a soft product like toys. Auto ancillaries have also limited the receiving of supplies from China.
Many companies have asked people to work from home and travel especially overseas has been restricted. This may delay decisions which are critical in nature thus slowing the recovery happening globally. Second half of the year based on international calendar is likely to see the situation ease up if a prompt solution is found to cure this virus.
In our opinion based on current data the world order would be glad to experience similar gdp growth as was last year.
Russia has not agreed to a 1.5 million barrels per day cut thus helping in reducing the prices by the opec.The level at which crude price stabilizes is too early to predict.In a way this would be good for India as we have a large import oil bill.On the other hand it would reduce purchasing power in commodity dependent nations and may reduce opportunities for exports.
The moot question is till when is this situation likely to be solved and what is the road ahead?
It is difficult to predict when this issue is likely to be resolved. However given that markets tend to discount the future one may see a bottoming out of markets sooner rather than later.
What should one do with the portfolio?
One need to see things in perspective. The world has always seen multitudes of such situations which felt similar to what we are experiencing now.
It is a hold for existing investors. For those who have been on the sides for a long time citing market valuations in India are expensive they may not get a better opportunity to enter.
Once the credit cycle picks up one would see markets move and it is more likely in second half of India’s financial year.
Till that time we recommend adding gradually to asset classes which are likely to deliver in line with risk reward.
Where are we seeing risk reward as favorable?
Broad sections of the market even in the large cap category are becoming attractive although it is better to invest when the nifty is above 10800.If not then one may see a range bound market.
One space which we find interesting is the hedge fund space. Long short strategies are likely to deliver absolute returns in the next financial year. Conservative strategies in this space are likely to perform better. As compared to broker oriented portfolios these are better from an mf platform as it is less aggressive and has a higher reputation risk to protect.
Certain sections of midcap are interesting to look at.
A proven strategy is to look at systematic transfer plans which take care of market timing. These can be for a month or for even a year.
For non resident investors the rupee to dollar situation has improved .This is a good opportunity to add to India portfolio.
Can this snowball into a bigger situation?
It is less likely as the world is working towards a solution. Digital methods of working are likely to get ingrained in workforces worldwide.
The teams working in the scientific community may find a solution sooner than later.
In this scenario our view is Return of capital is more important than return on capital. This too shall pass.