Last year in March as Covid hit the country we saw the nation Lockdown. The number of cases remained less than the overall panic in the system and many cities, towns and most villages remained immune to the disease. This was accompanied by a huge cut down in interest rates, fiscal measures, loan moratoriums and low inflation as the global crisis led to a sharp fall in most input costs for companies and inflation plummeted. As such when the economy opened up again consumer demand shot up immediately as most people had no real lasting impact on them. However this time its different.

The Second wave of Covid has hit the nation with great vengeance with a parabolic rise in the number of infected, daily cases and now deaths. Last year was about more fear and lesser real impact on individuals and families (leave aside some industries like hospitality, airlines, cinemas etc). However the second wave is much bigger, it is impacting most cities, towns and villages and is coming at a time when the global scenario is not as bad.

Last year was all about all economies coming down together, however this year is going to be completely uneven growth revival. Countries that get Covid into control faster will recover faster. Huge and sustaining global liquidity combined with expected economic revival has led to a huge spiral in commodity prices which is leading to inflationary pressures that were actually deflationary last year. As such prices are moving up with or without economic recovery. Large global economies like China, Britain and USA seem to be ahead of the curve in controlling Covid and will as such recover faster than earlier expected. The European Union could follow.

As people saved money in India over the last years lockdown and interest rates were low consumer demand revived very fast as the economy opened up. However this time we are staring at something very different. The impact of the second wave on the “Consuming” Middle Class and Affluent Class is drastic. No of daily cases are 350% of last years peak level already. While last year we could count on fingers the number of cities that were impacted hugely by Covid this time the list is very big. It has spread out across villages, towns and cities.

As such there will be a several fold impact on consumer demand in my view. Firstly interest rates are already at levels below which they are unlikely to go, as such monetary stimulus will be missing. Secondly Fiscal Stimulus is unlikely as the government has little space for that. As such stimulus will not boost demand. The second part is the real impact on families across the board. While six months back I could count on my fingers the people I knew who actually got impacted by Covid, today the list is very large. Every family seems to have someone or the other who is impacted. Consumer demand has two elements related to what people can consume and what people feel like consuming. Sentiments have got impacted drastically. The sense of fear and anxiety is palpable. The impact on incomes and household consumption will be real this time.

Last year saw people upgrade their homes, buy personal mobility, spend on connectivity devices like smart phones and laptops, buy other consumer durables as people worked themselves at home, spent for their children who were all stuck at home etc. This year that demand is unlikely to come back. One big issue within all of this is the inflationary spiral led by the spike in input prices. Petroleum product costs are much higher, the rise in steel, metal and plastic prices have lead to a significant increase in many consumer good product prices and on top of that there are many components that are running short.

Now the lasting impact on consumer demand will also depend on the duration of the current Covid spike and where it peaks. For example with 349000 all India cases yesterday and atleast another 349000 actually infected and not detected the number of families getting impacted on a daily basis is in lakhs. If we peak out over the next two weeks and then see a sharp fall then the impact on consumer demand could be over 3-6 months. If it lasts longer the impact could be as much as an year. There is still a lack of clarity on the pace at which we will be able to Vaccinate as highly vaccinated countries like UK, Israel etc are bouncing back fast now.

In conclusion investing preferences in the equity markets might need to change from what worked last year. Investment related themes could do better than consumption themes. Financials that bounced back rapidly assuming low NPA impacts could see another round of NPA’s driven by MSME and Retail Loan delinquencies. Global themes like Pharma, IT or Agri Oriented themes could also outperform. While last year this time was about dart board investing i.e. whatever you bought went up the next one year will be tougher. The next few weeks will throw up good opportunities.

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