This is my second post in the series. First was Quarantine your strategy – dated April 1 ’20.

That post (given the steep decline in markets) was focused on what one should be doing depending upon his investing style.

The current post identifies the key factors that would determine the path to economic revival. This should further help in improvising one’s investing strategy.

Before discussing the key factors, let me highlight the two most important presumptions that I am making while determining my own strategy –

1. This is not a time to be over adventurous. Times are unprecedented and no one knows how the future will unfold. Yes, this too shall pass… but with how much pain – it’s anybody’s guess. So risk control becomes exceedingly important and if that means some quick opportunities have to be ignored, let that be so !
2. Economic engine is not a light button that can be switched on and off at will. There are too many inter linkages and dependencies. It will take time to revive and now that we are mostly shut, we don’t have a choice but to go through a complicated revival process. One can only wish that with some aggressive policies the path can be shortened. However, given government’s limited resources and focus on fiscal discipline, I am only factoring in ‘supportive’ and ‘not aggressive’ policy decisions in my base case.

Risk mitigation is the most important framework that I am trying to work with in today’s environment.

Yes, pundits would say, I might not be able to take advantage of the once in a lifetime opportunity thrown by the significant market correction… hmm… let me think again… NO, that’s fine… COVID2019 is also a once in a lifetime event that deserves a special treatment !

Also, just to make it clear… it’s not that I am not investing. I am only respecting risk and hence giving preference to certain kind of stocks over others.

Lock-down and the economy

We are in our extended lock-down period that is currently scheduled to end on the 3rd of May. Whether that happens or not, is anybody’s guess. However, few factual points to note –

• We are only 10 days away from the deadline and almost half of India (including the financial and national capital) is under no situation to lift it off completely.
• Government at the same time is aware of the continued (and maybe worsening) impact of the lock down on country’s economic health.
• Exemptions are increasingly being made to start gradually reviving the economy. However, it is bare minimum and one can safely conclude that for now we continue to be in a state of full lock down.
• Lock down even if relaxed, can be reinforced if the infection continues to spread. Government would find it very difficult to resist given expectations of the people at large.
• Governments across would continue to be extremely strict on the containment zones and sealing of the troubled areas.
• Most businesses are trying their best to survive through these very challenging times but are now getting increasingly restless. The financial burden is accumulating and they hope to soon get back to work.
• So far most businesses have resorted to salary cuts and hiring freeze. However, if the situation continues, widespread layoffs are not very far.
• Public at large is unprecedentedly fearful. Yes, this in a way helps as it makes people conscious, disciplined and compliant in the changed world of social distancing. However, the same can lead to unintended consequences towards economic revival.

Given the above, I believe that the following factors would play a key role towards the economic revival. This obviously assumes that virus infections continue to be at controlled expected levels. If that were to increase, I would presume that we will go back into the state of widespread lock-downs and we may have to deal with very different issues (get scared to even think of those !).

The factors listed below are worth considering when we start opening up

Migrant Workers This for me is extremely important. How they behave when we ease down is going to significantly determine how fast will we regain the normalcy.

They are an integral part of the overall economic chain and system – sectors, types and size of businesses. We are significantly dependent on them for lot of on ground work.

The fact remains that most of the migrant workers are currently living in a tough uncertain environment away from their family. Yes, governments and social organizations have been trying their best to make them feel comfortable but the wide spread concerns remain.

Once restrictions start easing, I would tend to believe that most of them would want to meet and spend time with their families. The fear of lock-down coming back may continue to linger on their minds and further prompt them to play safe.

I do understand that most businesses will work towards providing them a comforting environment, however it’s easier said than done.

Productivity All of us agree that it is unlikely that businesses will be allowed to operate at full capacity in the near term.

Social distancing, tight government directives and fearful employees – all will lead to significant productivity loss for the businesses. Yes, everyone will try to work as efficiently as possible but then businesses generally don’t work with too much extra fat. Besides, many of our manufacturing plants/ processes are designed in a manner that doesn’t allow much of social distancing.

As for now, most businesses though aware about this are rightly focusing upon starting back. However, as the activity starts happening, financials start dripping into the books, I expect significant noise and resultant actions around this.

Suppliers & Customers – the inter dependencies Businesses don’t work in silos. Every business has linkages with suppliers and customers.

For economy to work, the full chain has to work well. So far this was working like a well oiled machinery whereby everyone was aware about everyone else’s needs and had set up it’s systems and processes accordingly. Now, under the revised directives (and that too in many cases by different governments), it may take time to adapt to the new normal with it’s resultant impact on every business that I can think of.

Besides, transportation between states is a key variable for businesses to factor in while devising their revival strategy. Here again they are dependent upon the directives of different governments.

International Uncertainty The virus has impacted countries across the globe and every country is coming out with it’s own measures to handle the situation. There is no similarity and predictability in any country’s behavior.

Under the situation it becomes very difficult for any Company to predict it’s international business as well.

Credit to businesses and consumer Whatever we may want to believe otherwise, this is not going to come easy in the foreseeable future. The position will be especially tight for small businesses and retail consumers.

Banks and NBFCs are staring at an unprecedented and widely spread uncertain situation. Under the given situation, I really don’t think any of them would go adventurous and try to focus too much on growth. The focus entirely will be towards safeguarding and supporting their existing book so that the asset quality remains under control.

This is also a time when banks would try to avoid any negative news around them so as not to loose depositors’ faith.

However, at the same time if this sector goes into a shell, we are looking at much bigger problems ahead. This sector has to play a very big role if economic revival were to happen quickly. Hence, I do expect government to keep trying nudging and incentivizing this sector to expand credit. I will be very closely watching those measures and will accordingly improvise my investment strategy.

Politics This becomes more and more critical as the time passes by. People have expectations and watching the center and state governments’ actions very closely.

So far, the coordination between everyone is commendable. However, slowly the public has now started comparing between various state governments. This can have implications towards public perception and future elections. Under the scenario, state governments may try differentiating that can have implications for many businesses.

The above are the key factors that I believe would be critical to the path of economic revival. Please feel free to comment below or write to me directly at nitin@candidcap.com.

These are unprecedented challenging times for all of us. However, per me the most difficult job today is to be a policy maker. One just doesn’t know what is right and what is not !

I do believe that finally as a country we will emerge stronger. In the next post, I will try to cover why I hope COVID2019 might put India’s economy back to it’s golden days. If you have already not, do Sign-up to inves4 free membership to get timely alerts and access to the exclusive content.

Do read my 1st note of the series Quarantine your strategy – dated April 1 ’20 and lot of other useful content on the site.

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