Post this pandemic, the economic order will be reset and a new normal will emerge. Our marquee event - Voyage 2020 focused on decoding the post-COVID possibilities and opportunities.
Certainly, there are sectors which have borne the maximum damage and some which are able to outperform even during these challenging times. COVID-19 can lead to a change in sectoral leadership, like what happened during previous crisis periods. As people are locked into their homes, and the government is only allowing essential activities to function, the demand curve has shifted a lot.
The demand for personal hygiene & sanitation, FMCG products, and pharmaceuticals remained buoyant during this period, but other sectors could be staring at a huge loss with the exception of telecom.
With the fear of the unknown, people have already tightened their purse strings and businesses are also going under survival mode, preserving cash and holding-on their capex plans. The 1-year Nifty earning could go down to the negative territory and there could be a significant cut in the corporate earnings.
Through reforms in the land & labor laws announced in the stimulus package, manufacturing sector can attract new investments. The Indian consumption story is likely to remain intact and is a long-term story. We could expect demand to bounce back in FY 2022.
Sector wise Pharma, FMCG, Digital Services, Auto (two-wheelers) and Insurance sector may witness a huge spike in demand due to the prevailing market conditions. Whereas sectors like Leisure, Travel, Tourism, Hotel, Entertainment, Auto (four-wheelers) may take longer than expected to revive.
Impact on Banking Sector
With positive signs of containment of NPAs and the work done over the last few years to clean the balance sheets, the banking sector is once again finding itself in the midst of a crisis. Weak credit growth and recoveries from accounts can hurt the profitability.
The Micro, Small & Medium Enterprise (MSME) sector is an important part of the banking sector’s total loan book. Fearing deterioration of asset quality in the sector, banks are facing a risk of rise in NPAs and slippages.
If we look at the financial services and Non Banking Financial Companies (NBFCs) sector, which have been retail oriented, it is also likely to see an impact. However, entities with a strong balance sheet, corporate governance structure and strong patronage would be able to survive this challenging time.
The Covid-19 situation is evolving rapidly, and the total impact on the banking and financial system will be visible only after some time.
Impact on the Debt Market
The crisis in the debt market got severe due to the recent closure of certain debt schemes. In the current low interest rate regime and near zero inflation, navigating the market will be quite challenging.
The Reserve Bank of India (RBI) has taken various steps to maintain adequate liquidity within the banking system and handle the current sluggish economy. The Indian central bank is also likely to extend further rate cuts. These steps may not only boost liquidity, but they may also aid India’s economic growth, which may, in turn, complement India’s strong fundamentals.
In the current environment, investors looking to invest for short term can consider debt fund categories such as Liquid fund, Corporate Bond Fund, Banking & PSU Fund and Short Duration funds.
For investors who are looking to invest for long term can consider investing in a diversified portfolio with major allocations to large cap & multi cap funds and small allocation towards mid cap & small cap funds depending upon their risk profile.
The big picture may not seem positive currently. But, going forward, as we emerge from this pandemic, the economy and market confidence may recover. It’s just a matter of time.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.