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Economic cost of lockdown is quite severe; market to remain volatile

Gaurav Dua, senior vice-president, Sharekhan
The wheels of the economy would start to turn again. Finally, the government has come up with certain relaxations post the completion of the second phase of the lockdown on May 3. This essentially kick-starts the withdrawal of lockdown in a phased and a systematic manner by categorising the districts into three zones - red, orange and green – depending upon the spread of coronavirus.

That is something to cheer about. India has been able to do a good job in controlling the spread of the pandemic and set to move into a reconstruction phase for the economy. However, the economic cost of the lockdown is quite severe and still uncertain, to an extent that most forecasts on India’s GDP growth are nothing but guesstimates right now.

However, to get some sense of the extent of damage in a very simple and elementary way, it can be deduced that each day of the lockdown could amount to a loss of $10 billion to India’s GDP. It is arrived at by simply dividing India’s GDP of $2.7 trillion by 270 working days. So, a lockdown of 45 days means loss of close to $400-450 billion of productive output on the economy.

That’s not all. Even after the lockdown, the economy would be opened up in phases and will take time to return to its normal operating level. Also, the job loss and rise in stress on mid-to-small sized businesses would drag down the economy in the near term.

On the other side, the policy action in terms of fiscal and monetary support, along with a low import bill (due to fall in commodity prices, especially crude oil), would ease some of the pain and support the economy. However, it seems to be a complete washout for the global as well as Indian economy in the year 2020 and fiscal 2020-21.

Among sectors, there are those like pharma, consumer staples, telecom, and specialty chemicals that could be least impacted in the near term. On the contrary, the impact of lockdown and an economic downturn would be more prominent in case of automobile and other consumer discretionary companies, non-banking financial companies (NBFCs), capital goods and investment-related businesses. However, within the consumer discretionary space, we expect those companies to recover fast where the ticket size is not high (like shoes, paints, electrical appliances, etc) and the sales are not dependent on consumer financing/borrowings.

Brace for volatility

As regards markets, volatility could persist in the near term. Deep corrections usually follow a three-phase/wave pattern. The three phases of a bear market begin with a sharp fall initially, which is followed by a strong bounce/pullback in the second phase while volatility and correction set in again in the final phase of a bear market deep correction. Currently, we seem to be in the second phase of the three-wave bear market.

The recent rally has largely retraced 50 per cent of the decline from the peak of January 2020 to bottom on March 25 when Nifty hit close to 7,500 levels. So, the pullback could end sooner than later and investors should not be in a hurry to buy immediately. The better way is to invest systematically in phases and make the best of expected volatility.

However, investors need to be clear on their investment horizon along with risk profile before making further commitments into equities. That’s because stock prices of high beta stocks/sectors might give better returns in the initial phase of the economic and market recovery. On the other hand, those looking to build a core portfolio should ideally focus on the opportunity of picking good quality stocks at bargain prices to create wealth over the next few years.

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