Lockdown: Economic losses or clarity on an economic recovery?

The world stands united and is dedicating all requisite resources to find a vaccine and cure for to the illness. While a large segment of investors have moved from tracking macro-economic indicators and earnings recovery to tracking the number of patients recovering in the world, it is only a matter of some time before the world achieves medical recovery and then right around the block – economic recovery.

On 4th May’20, the Indian Government once again extended the lockdown. But, the Lockdown 3.0 comes along with a fair set of relaxations & guidelines allowing a couple of businesses to continue operating in less affected regions.
Here’s how markets reacted to the first lockdown.

During the first lockdown business were shut completely. Despite that, below measures helped markets pick momentum:

1. Stimulus Package: India announced Rs 1.7-lakh-crore ($22.5 Billion) relief package to take care of poor, workers and those who need immediate help amid the lockdown to combat the coronavirus pandemic.
2. MPC Actions: The MPC voted with a 4-2 majority to reduce the policy rate by 75 basis points to 4.4%and reverse repo rate by 90bps to 4%. CRR reduced by 100 BPS to 3% for all banks
3. LTRO 1.0: Auctions of targeted term repos of up to three years tenor for a total amount of up to Rs 1 trillion (0.7%of GDP) at a floating rate linked to the policy repo rate.
4. MSF: Under MSF banks can now borrow an additional 3% of NDTL (vs 2% earlier). This will potentially infuse Rs 1.37tn (0.6%of GDP)
5. Regulatory measures for banks: Moratorium of 3 months on payment of instalments in respect of all term loans outstanding as on March 1, 2020 permitted.

Lockdown 2.0 was not much different from the earlier one. Government did not allow any businesses to resume their operations. This period was very crucial as there was likelihood of surge in the number of active cases as world witnessed in the 2nd phase of lockdown but somehow compared to other nations, we have witnessed a flatter curve.

Like lockdown 1.0, RBI and our government did not leave any stone unturned to support businesses which were in trouble during lockdown 2.0 and announced the following measures:

1. RBI Lower rates: RBI lowered the reverse repo rate by 25 bps to 3.75%.

2. Targeted LTRO 2.0: RBI announced a second targeted LTRO of Rs 50 thousand crore on April 17, with a focus that liquidity availed under this be invested in investment grade corporate papers of NBFC’s with at least 50%of amount availed going to small and mid-sized NBFCs and MFI’s

3. Refinance facilities: Provide special refinance facilities for a total amount of Rs 50 thousand crore to NABARD, SIDBI and NHB to enable them to meet sectoral credit needs.

4. State Finances: Increasing the state’s ways and means to combat the virus threat by availing advance limit to 60% until end September – providing a temporary help to states and will probably reduce some of the upward pressure on state bond yields that was seen recently.

5. Regulatory measures for banks: Asset classification benefits for overdue accounts by allowing banks to not consider the moratorium period in the 90-day NPA period amongst other steps.

6. Liquidity for Mutual Funds: RBI decided to open a special liquidity facility for mutual funds of Rs 50 thousand crore. Funds availed under the SLF-MF shall be used by banks exclusively for meeting the liquidity requirements of MFs by (1) extending loans, and (2) undertaking outright purchase of and/or repos against the collateral of investment grade corporate bonds, commercial papers (CPs), debentures and certificates of Deposit (CDs) held by MFs.

Lockdown 3.0: 4th May 2020 – 17th May 2020

We have somehow contained the community spread due to the bold measures taken during the preceding two lockdowns.
Lockdown 3.0 is scheduled to from 04th May 2020 till 17th May 2020. However, as a sigh of respite to businesses, the government has issued guidance on reopening of some businesses in some areas. Guidelines will be area & business specific. Authorities have classified Indian districts into three zones (red, orange, and green). Curbs will vary from one zone to the other – maximum in red and minimum in green.

This clearly indicated government’s willingness to get the businesses back running as soon as possible. Lockdown 3.0 is expected to bring along some more fiscal & monetary relief measures by the RBI & Government of India along with India being able to control the pandemic and be successful in reducing it to a great extent.

Way forward:

Obviously, like every other time, even the preceding two lockdowns had its fair share of fence-sitters and like most times, they lost 100% of the chances they did not take. Lockdown investors have emerged winners so far, we continue to maintain a view that now is a good time to accumulate equity holdings, albeit in a staggered manner – either through a Systematic Transfer Plan or Systematic Investment Plan. As of now, a period of 8-10 months should be an ideal period to stagger investments to draw maximum benefit from the impending economic & associated capital market recovery.

“Far more money has been lost by investors trying to anticipate corrections,
than lost in the corrections themselves.”

Peter Lynch

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