Contraction an opportunity for long-term investors: Wood

Christopher Wood, global head (equity strategy) at Jefferies, has said the scale of economic collapse in India should be seen as a dramatic opportunity for long-term equity investors.

Earlier this week, contraction in the economy was the worst-ever in nearly four decades with gross domestic product (GDP) for the April-june 2020 quarter of fiscal 2020-21 (Q1FY21) coming in at a negative 23.9 per cent year-on-year (YOY).

The 23.9 per cent YOY decline in India’s real GDP growth in Q1FY21, and 22.6 per cent YOY decline in nominal GDP growth are as bad as anything that Wood has seen. He expects the recently concluded quarter to mark the bottom of the economic contraction. The 47.1 per cent YOY decline in real gross fixed capital formation, he said, is also gobsmacking.

“Such dramatic statistics highlight two points. First, the precipitous way the lockdown was announced and implemented in late March was disastrous for the Indian economy. Fortunately, it was relaxed from June. Second, the Indian private sector, be it corporates or households, has not received anything like the scale of fiscal support, in terms of transfer payments and the like, seen in so many other countries,” Wood wrote in his September 3 note to investors in GREED & fear. The fall in Q1FY21 GDP has seen most forecasters further cut India’s economic growth projection for calendar year 2020 (CY20) and FY21. Those at Nomura, for instance, slashed GDP growth projection to -9 per cent YOY in 2020 (against -5 per cent previously) and -10.8 per cent in FY21 (against -6.1 per cent earlier).

Pranjul Bhandari, chief India economist at HSBC, too, expects growth to remain negative until December 2020, before turning slightly positive in early 2021 (that too led largely by a weak statistical base). “Despite our forecast for a positive 7.2 per cent GDP growth next year, GDP is only likely to return to pre-pandemic levels in early 2022,” Bhandari added.

That said, Wood still remains cautious on the Indian financial sector, given the developments around moratorium and its implications for banks and non-banking finance companies (NBFCS).

“To GREED & fear, the critical issue in the next 12 to 18 months is the extent of damage done to the loan portfolios of banks and NBFCS, in particular their consumer loan portfolios. In terms of recovery plays, GREED & fear would rather focus on auto-related and real estate plays,” he wrote.

And the markets, too, acknowledge this. At the bourses, the Nifty Bank index, a gauge of the performance of key banking counters, has underperformed since March 23 when the markets hit their recent low. While the Nifty50 has moved up around 50 per cent since then, the Nifty Bank index gained 37 per cent during this period, ACE Equity data show.

Meanwhile, Finance Minister Nirmala Sitharaman has asked banks to put in place by September 15 a loan restructuring scheme to rescue all viable business units affected by the Covid-19 pandemic. Banks have to approve their own loan restructuring scheme, which was allowed by the RBI in August for all types of borrowers – corporate, micro, small and medium enterprises, and personal loan segments.

“THE INDIAN PRIVATE SECTOR, BE IT CORPORATES OR HOUSEHOLDS, HAS NOT RECEIVED ANYTHING LIKE THE SCALE OF FISCAL SUPPORT, IN TERMS OF TRANSFER PAYMENTS AND THE LIKE, SEEN IN SO MANY OTHER COUNTRIES” CHRISTOPHER WOOD Global head (equity strategy), Jefferies