March 25th, 2020

Much has been written about the current Covid19 pandemic that has now hit 183 nations and shows no signs of abating. If anything, in the US and UK we are well into the acceleration phase and very possibly in India, we are at the inflection point that Italy and Iran were in the early stages of their outbreaks. The next 2-3 weeks will be extremely crucial, though India we think, has taken some learnings from the events of other countries.

One of the most difficult aspects of this episode compared to anything else that we have seen in the last 30 years is summarised in what Gregory Daco calls “the lockdown paradox”. This postulates that the more severe and immediate the lockdown, the better it is from a public health and safety perspective, the greater the chances of success over a 2-3 month period. The less draconian the lockdown, the less extreme the economic contraction but this is not great for public health outcomes and more people are put at risk. The severity of the lockdown absolutely decimates economic activity, livelihoods and jobs and so the trade-off between the economy and health and public safety is a near impossible one.

One of the missing ingredients in this entire episode, to our mind, is the lack of a co-ordinated response with individual countries acting on their own, as it were. The need of the hour is for the G7 to first step up followed quickly by the G 20 countries to articulate a coherent, co-ordinated response.

From an Indian standpoint, one would have feared the worst 3 or 4 weeks ago given the country’s vast and densely populated urban centres. Though cases are on the rise now, significant preparations have already been made to make the country best geared to respond and significant efforts are underway to “flatten the curve”. Though tests are still short of what they should be (capacity exists to ramp this up by a factor 5-6x) and we are likely to see a rise in total cases (from the current 500+; a mortality number of 100 already indicates that we will quickly get to a 1000- 1100 cases in a few days), recent proactive measures such as a complete country wide lockdown are all out to contain the community spread. The lockdown of 1.3 bn people in unprecedented in India history and which most people would not have thought possible even 30-45 days ago. This is indeed the need of the hour and the next 3 weeks will be crucial in deciding the trajectory of the infection rate.

The economic impact that will be felt in India will be significant with the demand shock taking away possibly 1-2% of GDP in the near term. This is a guess as no one really knows this and there are no models to be able to project that . India, from a policy standpoint we think has been a little behind the curve. The fact that the RBI has not come in and announced an aggressive rate cut along with other measures such as forbearance is puzzling. The optics indicate that there is a mere tinkering at the edges as opposed to a “we will do what it takes” approach that we are hearing from the US and Europe. The absence of an aggressive set of measures as announced by the US and several countries in Europe is missing in India for now and this is causing more angst amongst the larger investment community.

That said, we are of opinion that this is in the works and will be announced soon though it is also our view that delays translate into greater uncertainties. One of the single biggest beneficiaries of the global rout in oil prices is India and with a fiscal bonanza of ~ $15 bn through savings and domestic tax related gains, it provides policy makers with a little bit more ammunition to provide a fiscal stimulus. It is our belief that we should have a stimulus package that could translate into ~ 2 % of GDP to begin with.

India must adopt a “do what it takes” approach. Although there are significant trade-offs with the fiscal going off the rails and potential ratings downgrades, those must be kept by the side in times like these. Indian policy makers must act NOW.

From an investment perspective, the key points to focus on are:

1. While the next 2 to 3 quarters will be a rout as far as earnings go, over a 3-5 year period, high quality businesses will come back to their earnings trajectory.

2. The pandemic has not so far damaged any one of the structural pillars of the India growth story. The twin drivers of under-penetration and premiumisation have not been dislodged.

3. A lot of quality businesses will be stress tested and will come out stronger from this. Those that are efficient capital allocators, are sitting on cash and those which are agile and nimble will be disproportionate beneficiaries of this dislocation over time.

4. A lot of quality businesses may actually find newer opportunities for growth opening up. Insurance companies are likely to see newer opportunities as they come out from this.

5. A lot of businesses could use this opportunity to bring about changes where required in operating models, processes and other areas which heretofore they may not have been able to alter.

6. As we enter the first of its kind lockdown and with broader markets down 35%, investors in general are better of reversing the “prudence-audacious equation”. This is that while individuals seem to be audacious and reckless in their individual lives thus endangering public health and safety, they seem to be extremely prudent and panic stricken in their investing worlds. They need to switch and actually become brave and audacious to invest while at the same time becoming extremely prudent in their individual lives to ensure the greater good of health and public safety and curtail the spread of the pandemic.

The resilience of humankind is un-paralled. Though governments and policy makers don’t seem to be acting in tandem, this pandemic in many ways has brought together people in ways we would not have thought possible. As we cast our minds back, collectively, we have lived through the GFC, the tragic events of 9/11, the bursting of the dot com bubble, the outbreaks of Ebola, SARS and MERS. Further back, our collective resolves and resilience have helped us navigate through the East Asian Crisis, the oil shock of the 70’s, 2 world wars, several pandemics and the great depression.

While each of these have led to tragic human suffering and loss, through and after each, people of the world have come out stronger and more resilient. This gives us hope and strength that we will navigate through this too.

Finally and perhaps most importantly, for long term investors, its imperative to have a plan to invest and stick to it. In the volatility and extreme panic, its easy to get caught up in “the deer in the headlights” phenomenon and the only thing worse than acting in fear and panic is to be too bewildered to act at all. Therefore, as we go through the mayhem, its important for investors to look past the next 3 quarters and assess businesses on their ability to stay the course over the next 5- 10 years.

As we have said before, investing when terrified is one of the hardest things to do.

Posted by Siddharth Mehta, Founder & CIO