ET Wealth | How to survive the coming recession

India is staring at its first economic downturn in 40 years. Despite the stock market showing up upbeat, economists are revising development estimates downwards regularly. “ Our own current estimate for 2020-21 is definitely -2. 1%, assuming the lockdown will not be extended beyond 31 Might. If it is extended, we will revise quotes, ” says Sunil Sinha, Primary Economist, India Ratings. He is not by yourself. Crisil has also downgraded its development forecast for 2020-21. “ Because of the COVID pandemic, the first quarter associated with 2020-21 will suffer a staggering 25% compression and despite some recovery within the second half, the Indian economic climate is expected to end the monetary year with a 5% contraction, ” says Dharmakirti Joshi, Chief Economist, Crisil. Unlike previous recessions— Indian has seen four since Independence— agriculture is expected to report regular growth this time. The overall numbers is going to be dragged down by the services field and industries like manufacturing, exploration, etc. One of the major factors adding to the sorry state of affairs has been the particularly prolonged lockdown. “ Industry plus services would have restarted if the lockdown was withdrawn after the first stage. However, the massive reverse immigration of laborers is changing the particular picture now. Due to this, economic exercise will not be back at normal ranges anytime soon, ” says Sinha. The global nature of the pandemic has put into the woes. “ The global interruption has upended whatever opportunities Indian had on the exports front, ” says Joshi. 1. Blow in a bad time while much of the problems throughout the economy can be traced to COVID, the particular picture was not rosy to start with. India’s s economic growth hit ten years low in October-December 2019— much prior to COVID and the lockdown happened. When compared to the same period last year, industrial manufacturing contracted by 16. 7% within March. As the lockdown came into impact only in the second half of 03, negative performances of this magnitude can’ t be attributed to the outbreak. GDP fell to a decade lower of 3. 1% in the 4th quarter. India’s score field output contracted 38. 1% within April, the worst performance given that 2005. This does not bode nicely for first-quarter numbers. Indian Inc was struggling even throughout the January-March period and its aggregate income and net profit fell six. 36% and 9. 95% correspondingly y-o-y (see chart). Most areas reported falling net profits within the fourth quarter (see table). Agrochemicals and cement were among the few that bucked the trend. While final year’ s good monsoon plus increased planting helped agrochemical businesses, fall in input costs helped concrete companies. Several sectors like structure, real estate, and telecom, slid through profit to losses. Already poor economy becoming weaker instead of sluggish growth, the economy is expected to the agreement in the next two quarters. 76103888Contraction in industrial production worse compared to what it was during 2009 crisis numbers will become worse as the lockdown halted all activity April onwards. 76103894Compiled by ETIG DatabaseQ4 figures look grim, more bad information likely despite the tax cut advantage, net profits show fall associated with 9. 95% so far. 76103901* In line with the results declared by 290 businesses so far. Compiled by ETIG DatabaseQ4 internet profits slump in most sectors only agrochemicals and cement managed to buck fashionable. 76103912Note: Values in bracket are usually the number of companies that have declared outcomes. Compiled by ETIG Database2. Earnings stock corporate profitability remains an area of concern using the numbers expected to be bad within 2020-21 as well. This is because the first one fourth will be a washout due to the lockdown plus there is no clarity on how things may shape up in the second one fourth. “ Earnings growth in 2020-21 will be really bad. Even if the lockdown goes, it will take some time before matters come back to normal, ” says Raamdeo Agrawal, Joint MD, and Co-Founder, Motilal Oswal Financial Services. So how a lot would the aggregate net income fall by? “ Nifty income is expected to contract by about 20% in the first quarter plus 5%-7% in the second quarter, ” says Shailendra Kumar, CIO, Narnolia Financial Advisors. “ Aggregate profits in 2020-21 may fall simply by a high single to low dual digits. This is on the assumption that will Covid-19 cases will peak within June-July. If there are second or even third waves as feared, the income contraction will get extended to 2021-22 as well, ” predicts Pankaj Pandey, Head of Research, ICICI Immediate. The high base effect triggered simply by corporate tax cut in 2019-20, will also impact earnings. “ Although the lockdown impact was only for 8 days in March, the fourth one-fourth results are not great. Lack of business tax cut benefit will be one more why 2020-21 earnings growth is going to be negative, ” says Rajat Sharma, CEO, Sana Securities. However, it might not be all doom and gloom. “ Recent increase in power requirement shows that some economic activities are usually back, maybe in green areas, and that is positive news, ” states Agrawal. “ Most stores are usually empty now because they are not obtaining enough products due to the lockdown plus logistic issues and restocking simply by dealers before Diwali will press sales at company levels, ” says Kumar. One can’ to decide on market investments based on basics alone. While fundamentals are expected to become weak in 2020-21, the stock exchange may remain strong in the short term because of increased liquidity. Here is what you should perform as an investor. 3. Ignore the omitted feeling Along with global indices, the particular Sensex has also rallied 25% through the March closing bottom of twenty-five, 981, mostly on hopes associated with further actions by governments plus central bankers across the globe. Feeling overlooked, several investors are ready to jump within now. However, experts say this is simply not the correct strategy. “ When elements turn around, the market will give enough for you to get in. Investors should avoid the anxiety about missing out and wait for opportunities, ” says Jimenez Modi, CEO, Samco Securities. While the broader economy is usually heading towards a recession, stock exchange valuations are still high, another reason why experts are asking you to be careful and wait for further corrections. “ The Nifty has fallen from the peak, but it still remains overvalued. Though liquidity can keep the market solid in the short-term, reality will cope up eventually. The Nifty may get back to 7, 500 levels in the next 6-8 months, ” says Sharma. Amit Jain, CEO & Co-Founder, Ashika Wealth Advisors concurs. “ Because of the expected fall in EPS, the assessed PE ratio will go up within the coming quarters. Market sentiment may also take a hit later because the wellness crisis is turning into a financial turmoil now and soon, this will become a geopolitical crisis. Wait till Oct for a better opportunity, ” he admits that. Analysts have cut EPS quotes for 2020-21This fall is likely to gain momentum once all businesses declare results. 76103921Source: Bloomberg; Published by ETIG DatabaseSensex PE still over 20-year average need to be cautious mainly because PE may go up in the long term due to fall in earnings. 761039274. Market on rallies while weak fundamentals pull the market down, the same is backed by liquidity injections by worldwide governments and central bankers. This means the market may go up further for the short term. So, the best strategy right now would be to utilize the prevailing bullishness. “ We are in a sell on move phase and investors can brighten their equity load if the marketplace continues to move up, ” says Modi. 5. Moderate fin sector numbers since RBI’ s recent measures can help banks to suppress their non-performing loans (NPLs), the reported income from the sector are likely to be higher than the actual profits. For example, the extension of aufschub by another 3 months means less ‘recognized’ defaults by banking institutions and NBFCs during the first plus second quarter of 2020-21. RBI also allowed banks to transform interest on working capital financial loans into term loans repayable simply by March 2021. In addition to helping document higher loan growth— just guide entry, not actual new loans— this will also help banks force this default to the next fiscal calendar year. 6. Look beyond the P& D account avoiding small companies with vulnerable balance sheets and sticking to large companies with strong balance bedsheets can be the next strategy. “ Within crisis situations like this, there will be a fatality in the corporate world as many weak companies will die. Considering that big and strong companies will end up bigger and stronger, investors ought to bet on them, ” says Agrawal. The expected earnings volatility can be another reason why experts are asking you in order to concentrate on balance sheet strength. “ With this kind of earnings volatility, earnings-based valuation won’t work. It is best to look at the balance sheet. The companies along with strong balance sheets can survive the particular turmoil, ” says Pandey. Modi agrees. “ Concentrate on companies which have the balance sheet strength to survive 2-3 years of pain, ” he says. Along with cash on books, investors must also look at cash flows. 7. Avoid cash-strapped firms we all know the debt is really a bad word now and it is wise to avoid companies with high financial obligations or those expected to raise financial debt in the future. However, investors must also avoid companies that need to raise funds in the form of equities in the near future. “ In the present depressed market, dilution will be higher because companies don’ t be capable of getting the right multiple. For example, banks increasing equity below book value is certainly bad for existing investors, ” states Pandey. 8. Stick with promising sectors strategy that will work in the immediate is to go with sectors that are likely to do well in 2020-21. For example, THIS and telecom may do well since the entire world is becoming more digitized due to the age of working from home. As the pandemic is really a health crisis, the pharmaceutical is an apparent sector that is expected to do well. “ Pharma sector is also getting a large amount of funding now, ” says Sharma. Since people can’ t prevent basic consumption, FMCG is another industry that will not be impacted badly in this particular turmoil. The impact of lockdown is much smaller in rural places and therefore, agriculture and related areas are also expected to do well in 2020-21. 9. Look at market share you might be tempted to look at sectors that are likely to do badly because of falling discuss prices. Anyone using this strategy needs to scan the quarterly numbers designed for market share gain and not headline cash flow. Profitability will fall because the whole market will shrink. “ The businesses that can gain market share in circumstances like this will be the ones that will be capable of report good numbers in upcoming years, ” says Kumar. Nevertheless, one should not ignore valuations. Allow us to take the example of the NBFC field, which has been in turmoil for the last couple of years. Strong NBFCs have increased their own cash holdings to survive this stage (see chart). Strong NBFCs are usually increasing cash in their balance linens While looking for stability, investors should think about valuation as well. 76103939Source: Motilal Oswal report there is no doubt that a business like Bajaj Finance will endure the turmoil in the consumer fund space using its balance sheet power. However, is its high value justified? “ Bajaj Finance’ s i9000 high valuation is not justified due to the fact people are losing jobs and they might not be able to pay back their loans used for consumer durables, ” states Sharma.