Market Meltdown, the Virus, and our Actionables

I don’t think there is going to be a very large disruption if your time frame is 5-10 years. Yes travel and tourism is going to be very hurt and leveraged players there are going to go bust. Yes, working remotely is going to find favor where it is possible. People’s concern with hygiene is going to go up in the short-term. In the long-term, perhaps not so much. We weigh cost-benefits on a rolling basis and not absolute basis. In other words, we will be hygienic, when necessary.

Coming to govt. money and migrant labour - Let’s take a step back and see what macro changes are somewhat long-lasting from this crisis

a. Crude price drop may be here to stay for awhile. This might be because Saudi/Opec and Russia were in a iterated long-term prisoner’s dilemma where currently both players have played the ‘Defect’ card. This takes awhile to get back to normal and for the co-operation to come back (using constructs from Game Theory) which could mean lower prices for sometime (Demand wasn’t holding up the price lately, as much as cartelisation was)

b. (a) leads to this naturally. This is a bonanza for us. We roughly import 3 lakh Cr and export 2 lakh Cr, leaving us a trade defict of 1 lakh Cr roughly. Of the 3 lakh Cr. imports, about 33% are crude and related products. A 50% cut in its price means about 50k Cr saved for us - per month. (This is still first-order thinking - what happens if our exports shrink due to drop in world demand and a fallout from globalization to localisation)

c. Lets get to fiscal deficit from trade deficit. The govt. has increased excise duty smartly and has not passed on benefits. This leaves a lot of space for the govt. to maneuver. It also has a supportive central bank and a crisis - All giving it the license to go all out to spend.

So govt. has a lot of money to spend and the license to spend and there is a lot of labour available and energy from crude available for cheap. This might mean a kickoff of large infra projects (Can only be played via commercial banks, zero debt infra ancillaries if you are conservative)

Then there is the low interest rates, low inflation and possible high growth (Goldilocks economy) in the horizon fueled by all the above. It may not be tomorrow or next week but could play out after a year or two. This is the natural and high-probability outcome of a big crisis. This is the only time I am willing to make an exception to buy financials because that’s the only time they are available at realistic valuations (sans fiction, multiplied by fiction).

Recovery is not around the corner but its inevitable from a 2 year perspective. Market has rushed to factor in the near-term disruptions but may not have factored in the time required for recovery (the 1-2 years), now this may never get factored in, if the market sees a recovery as inevitable and is willing to wait. World is flush with cash in a near zero interest rate environment and will take any growth it can. All we have to do is not screw up poorly.

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