LOCKDOWN DAY 9 DIARIES – A TOUGH TWO DAYS

We are now into Day 9 of the nationwide lockdown. While the lockdown overall in India has been quite diligently followed and many cities and towns are almost totally shutdown there have been areas of concern that have come about over the last two days of specific localized infections of Covid19 in a few places and the Nizammudin Congregation related cases that blew up over the last two days.

1. As expected most Auto companies reported a significant fall in March sales as the showrooms were effectively shutdown during the last 15 days of March. The same would be the case for many consumer durables as the entire auspicious period of Navratris got subsumed into the lockdown
2. The No of Covid19 cases in India have moved up sharply over the last two days. While getting to 200-300 new cases was expected as testing went up, there has been a significant explosion due to the religious congregation at Nizammudin in Delhi. This could compromise the entire purpose of the lockdown and push India’s fight back by a few days if not more
3. The earlier impacted countries like South Korea, China, Japan, Singapore etc seem to have not stabilized. In general the No of recoveries every day are more than the No of new infections in these countries. This is a positive sign amidst all negative news flow
4. No of new cases in Italy and Spain the two worst hit countries till now have stabilized albeit at higher levels. My expectation is that by the weekend we will also see that Italy will enter into a phase where No of new infections every day will be less than the No of people getting discharged which will be followed by Spain
5. This then raises the question on the Indian lockdown and whether it will be extended. I think No of new cases per day till the 7^th of April would be very important in that decision, however the way things are looking we could be looking at atleast one more week of shutdown
6. The question then is whether the entire country should remain shut down as many areas are either not affected or very less affected. In the year 2015 when swine flu hit North India, officially around 35000 people were infected and more than 2500 died. However we had no shutdown and there was no big noise and the flu died its own life. As such the debate will need to shift to the cost to the economy, no of people who might die of lack of food and jobs or proper treatment of other ailments Vs Covid19
7. The stock markets have been extremely volatile as they have tracked global news flow. We saw the Nifty see saw by 300-400 points each of the last three days. In the USA also after initial denial the establishment has now readied the public for a huge spike over the next 2-3 weeks. This assessment has impacted global financial markets despite the passage of the US Fiscal Stimulus Bill. However all of us need to realize that even with such huge increase in infections the lockdown even in New York is nowhere near what we have in India.
8. Global Volatility has started to come down as most investors and traders absorb the newsflow. The CBOE VIX which spiked upto 85 levels when the US Markets made a bottom on the 23^rd of March has started to come down steadily. Yesterday despite a nearly 1000 point drop in the Dow we saw that the VIX spiked up from 53.5 to 57.06 a much lesser spike than what was happening over the last few days. This is the first step towards markets factoring in the worst
9. Two phenomenon normally happen in the markets after such a severe spike down. The first is a retest of the bottom which would require markets to correct by around 10% both Dow where bottom was around 18300 and we are at 20900 now and also the Nifty where we are at 8250 and bottom was near 7500. The other is that we make a higher bottom. My view at this stage would be for a higher bottom.
10. In the Indian context it is now very important for the government to immediately come out with a strong fiscal package which compensates companies and businesses for the salaries that they need to pay during the shutdown and also cover the fixed costs in terms of rentals and/or interest payments. RBI measures were extremely positive, however they just push back the issue and do not resolve them. However lower interest rates and RBI actions will help a faster recovery after the crisis gets over
11. Most people don’t realize that the government needs to act fast on the second round of the package as delays will lead to firing of contract workers, increased migration back even after normalcy returns and push back recovery significantly after the lockdown as many businesses and companies will not be capable of coming back. Since this is a global event a one year increase in Fiscal Deficit is unlikely to impact the credit rating in any big way

Overall we are starting at a crucial week going forward both in terms of the actual spread of Covid19, the Economic Response by the Government as well the impact of a prolonged shut down.  At this stage there is no medication regime that’s conclusive proven to reduce Covid19 symptoms although newsflow on multiple Vaccine developments to come in before next years flu season are positive. The extent of spread of the virus in India is also still unknown as some level of community spread is very clear now. Consumer and Telecom Stocks should recover the first post crisis and depending on the governments fiscal response possibly Consumer Durables. At this stage the view remains that the low of 7500 on the Nifty