At the time of writing, President Trump has just come out of the hospital after receiving treatment for Corona virus and the whole election has been virtually turned on its head. There are so many variables right now. How does this impact Trump’s campaign? Will this stall a fiscal package or accelerate it? Will Trump get the sympathy votes (like Boris Johnson in the UK) and would there be an attempt to delay the election, which would require an act of Congress? So, what was already looking like a messy affair, with the election result not likely for weeks (and even then, possibly contested) looks to have many more turns and twists left before election day. For certain though, this will add volatility across asset classes and possibly lead to a risk-off trade as investors look for safe havens.
Looking outside of the US elections, PMI's globally have continued to improve, especially in Asia. In fact, China has seen a "V" shaped economic recovery and we believe this bodes well for Asia as a whole. If there is a vaccine made available later this year /early next year, we believe it will accelerate growth across Asia, led by China. Our view, therefore, is that the US dollar will weaken against the Yuan, and similarly against Asian currencies, going forward. This should lead to strong capital flows in emerging markets with Asia seeing the lion’s share. India, given its weightage in Emerging Market indices, should also receive strong flows.
The one concern we have globally, given the stop-start approach being adopted by governments towards lockdown, is that much of the best economic news may be behind us and the next quarter or so could see anaemic growth, at best. Indeed, the increasing number of layoffs globally is a worrying sign. No doubt liquidity will be the saviour, but markets really have baked in a "V" shaped recovery and anything less could result in markets retracing some of the positive gains seen over the past 6 months. Maybe last month was the trailer for October. Uncertainty is no friend of the market.
The passage of labor bill and agriculture bill was another landmark for India in its move towards improving the ease of doing business ranking. While there are sceptics of these new laws, according to us these are much needed reforms to support growth over the next decade.
On the business activity front, we continue to witness improvement in most indicators for September as the supply chain normalisation was evident across most sectors. While demand indicators also improved gradually, all hopes are now pinned on the ensuing festive season from mid-October to November to figure out sustainability of the recovery. The upcoming financial results season for the quarter gone by, will provide us more evidence on the shape and durability of the current recovery phase.
At country level we are witnessing number of active cases easing off with lower testing. With Unlock 5.0 guidelines, it is very evident that extended and widespread lockdowns are a thing of the past. The Central government’s focus is clearly on opening up of the economy; however localised lockdowns cannot be ruled out in few select cities and areas and that too for short periods.
The automobile sector showed the most positive momentum, as inventory levels which were abysmally low at the start of the lockdown are getting back to normal. Our channel checks suggest that automobile growth will remain buoyant for at least couple of more months and may get extended to two quarters if festive demand is strong.
Similarly, commentary from various large corporate is soothing as most are indicating that business impact is not as severe as was anticipated initially when the lockdown was announced. Yet, lockdown fear is a key risk which most corporates are worried about.
Weak credit growth, high inflation, Supreme Court’s relief to borrowers and intermittent localised lockdown is keeping the BFSI sector circumspect. Our interaction with most financiers suggests that things are coming back to normalcy faster than anticipated, but a clear picture will only be available by January.
Our Finance Minister in her recent media interview talked about the likelihood of further fiscal stimulus. One of the media reports also highlighted that government was weeks away from announcing another fiscal stimulus package ahead of the festive season which may include an urban jobs scheme and a massive infra thrust. We believe the announcement will largely be in line with the previous set of announcements which were more focused on long term reforms rather than putting more money in the hands of people.
Economic indicators improved with the opening up of the economy. While most recent macro numbers, like PMI, BoP, CAD, GST collections, have improved, but still they are inconclusive to imply a smooth recovery phase.