‘It is all about cash flows to tide over the period of no production or sales’

Published: March 27, 2020 6:15 AM

Market could test lows globally from here if the shutdown goes beyond what everyone is hoping for at the moment. Everyone wants to start getting things back to normal by April or May.

Market could test lows globally from here if the shutdown goes beyond what everyone is hoping for at the moment.
  • By Malini Bhupta

Equity markets have been in a bear phase since the start of this year with investors taking risk off the table, as the novel coronavirus started spreading and different parts of the world announced lockdowns. Andrew Holland, CEO of Avendus Capital Market Alternate Strategies LLP, tells Malini Bhupta in an interview that there could be further pain for markets, if it takes longer than estimated for things to get back to normal. Edited Excerpts:

Are we close to stability with markets gaining some ground on Wednesday and today?

I think what we have seen so far is a relief rally ahead of all the global fiscal and monetary packages. So, I still think we are a little away from stability at present. What we need is a week of range-bound markets rather than sharp rises or falls.

You’ve said that this crisis is different from the global financial crisis of 2008. Can you explain as many are comparing the two?

I suppose you could say the financial crisis was a making of our own and did affect a wide range of industries. The Covid-19 virus, however, is truly new and hits everyone of us. Not in my lifetime have I seen a total shutdown of global economies and movement of people. Yes, there have been stock market crashes, which have led to recessions, but never at the same time. So this time around, it is not just one country or sector being affected, it’s all sectors and people. That’s the main difference.

Why did markets not see this coming. Why is that so?

Throughout January and February, it was seen primarily as a China problem and the main concern was that it was going to cause a supply problem. But then, as we moved along, and the number of cases started to rise globally then it became a potential demand problem. Importantly, Nobody was expecting a shutdown like China anywhere else. So people outside of China were still flying, meeting, etc, as no one took seriously the potential spread of the virus. Once the number of cases started to rise rapidly in Europe, the market started to quickly bake in the potential economic problems countries would face.

The $2-trillion stimulus package has been cleared by the US, is that sufficient?

I think it is sufficient for a one-two month shutdown but I think there will be additional packages along the way. If workers get back to work in 1-2 months then it’s a good package, but if that’s not the case, then it is probably not going to be enough. So the narrative is changing as to getting the economy moving and back to work otherwise the whole population will be impacted and could lead to depression.

Will people come out to work even after the three-week lockdown is over?

Let’s say that the government says cases have peaked by April 15 and it is ok to go back to work. At some point, you have to go back to normal life. You’re working on the basis that whoever has not got it will not get it. This will happen every year till we find a vaccine.

We have a lockdown of 21 days. What is the impact of this going to be on the economy?

Let’s just say that agriculture is still working and that’s 30% of GDP, which means 70% of GDP is locked down. You have one quarter of negative growth. Have seen forecasts of 2.5% but I think that’s optimistic. It could be more 0-1% because everyone will be more cautious till you start to do normal things.

Financials have taken a huge hit as the assumption is that the health crisis will turn into a financial crisis. Do you see the same?

That’s been the fear everywhere, which is why monetary policy has played a big role in ensuring that bond yields are not spiking. The central banks have reduced rates and now a package has been announced that will help businesses. It is all about cash flows to tide over the period of no production or sales. Whether the moratorium is for three months or six then businesses can tide over. The problem is if this lasts longer than that.

What kind of companies will survive this?

Any company that has a lot of cash on their balance sheet. But, obviously food, beverage, pharma, IT, telecom will all do well during these difficult times.

How do bear markets work and where are we right now?

Usually, you start saying you are in a bear market when you fall 20% from peak. That’s what happened in December 2018 when many markets fell by 20%. Sometimes when you are in bear market territory and then some things change and you recover. But the difference is that this time is about the shutdown. Market could test lows globally from here if the shutdown goes beyond what everyone is hoping for at the moment. Everyone wants to start getting things back to normal by April or May. If that’s not happening then I don’t think that’s baked into markets. If this is not three months and six months, then everything goes out of the window.

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