WOULD MARKETS HEAL AFTER COVID?

Due to coronavirus all of us are locked down in our houses with our lovely family to spend time with and acquire new skills and knowledge for which we were trying to find some time out of our busy routine. There are numerous articles on how behaviours and business models are likely to change.

Right now, as we think about changes in our life about how we can better reorganize our lives after this ‘do it yourself’ experience and beginning to question why do we need so many things?

It is interesting to take a look at which direction the financial system and markets could take as soon as the covid ends. The Indian Covid scenario has begun and hence for almost all market business holders there has been little hardship other than mobility being an issue to deal with. However, the real impact is yet to be seen as the COVID ends.

Hopefully it gives a good turn and recovers as soon as possible. The forecast now is based on expectations, which is equivalent to tossing a coin. What’s the base case scenario that is being priced in by markets across the globe?

The pandemic is worse than the GFC with every individual and business impacted adversely. However, it is unlikely to have long-term implications if we are able to control the current situation and act wisely. In India, the expectation is that this phase will remain over a 3 month time frame and a large number of businesses can face a hard failure but will be back in the race soon. Equity markets are superior after the sharp correction we had last month.

This is the Goldilocks scenario for us but we need to make sure that financial conditions facilitate such a trajectory. Herein lies the catch Extrapolating the events that have taken place over the last eighteen months, is there confidence of that happening? Banks have had a torrid time navigating the corporate asset quality cycle and their risk appetite today is possibly at its nadir.

The target portfolio of any fund manager would comprise only companies that have little or no debt on their balance sheet. Retail and small business lending were the ones that were the favored lending segment for banks and NBFCs but Covid is going to reduce additional lending a lot for these constituencies. There is hope and prayer on every bank’s lips that the retail delinquency cycle does not get affected due to the pandemic.