Expect demand to start picking up post Diwali: Nitin Jain

‘We have to ensure that the companies in this period are able to sustain themselves’

Though the overall economy is coming down, a handful of companies are going to come back very strongly, says the CEO of Edelweiss Global Asset and Wealth Management.

Let us start by understanding your thoughts on the entire investing landscape. How are you analysing this macro set up and within that the market?
A lot of us are grappling with this issue because these kinds of prices are unprecedented. It is absolutely a black swan because I do not think any of the market participants, regulators and governments globally have any history of dealing with such a crisis. Even if you want to go back and read, it is very difficult to find a parallel. The only parallel that one can probably say is Spanish Flu and there is very little documented history especially around economic data of those times. So nobody really has a play book to project and decide what path is probably going to be the best. A lot of decisions are being taken and they would be modified as and when you start to see the outcomes.

But just coming back to what you asked me. When I talk to all the economic commentators, the general consensus that we are all coming to is definitely that the world is going through a contraction. Earlier there were some people who believed that India might just escape with maybe 0% or 1% positive growth but the extension of the lockdown and the way the curve has still not really flattened out in the country has taken that expectation out. Most of the people now believe that the general or the average consensus around the GDP for the year is going to be around -5%.

I hope we limit our damage to that or slightly below. If that is the case, we are still in reasonable shape. But if you think about 5% negative GDP and in the beginning of the year, you were thinking about plus 5% GDP; that is a 10% swing. So it is not something that you can wish away.

You were speaking about the gap which has got in the economy which would be coming in because of the stimulus. The government is not averse to further help the economy in order to induce more demand. If you tie it with the hypothesis which you are actually building in, what is your reaction to this?
Despite all the criticism that the government has got in the last one, one and a half months, they are doing something reasonably smart because they are not stopping with a one big bang package and they are taking incremental steps and are very open to suggestions and the feedback. There is a 20 lakh crore real loss to the economy. It is just like normal P&L of let us say any corporate, but it is at the economic level that you are losing Rs 20 lakh crore. How do you fill that gap as a combination of what the government can take by measures of stimulus or by monetising debt; basically up-fronting the expenditure from the future. I think that will be a critical part of this. The government is thinking in the direction so that households do not take too much of a damage because the weakest balance sheet amongst these four is actually the households.

So in the process, if we end up losing a lot of jobs and the general sense of despair that comes in the general crowd, that will pull the demand back in a sustainable way and it will make it very difficult for the economy to come back. Hence my bias would be to take a lot more of this hit on either the government balance sheet, share it with the financial sector and share it with the corporate sector. There is no way we can get away with this. It has to be shared because this is a real loss of income. But how do you do that? We have to be very careful about how the split happens and ensure that as far as possible, we protect the households balance sheet.

Coming back to the markets; I think markets went through the phase of complete capitulation and markets have this habit where they try to project the future and try to adjust very quickly. So where I come from is that the markets have actually kind of adjusted to the worst case hypothesis very quickly. That was in the period of March and maybe beginning of April and now as the economy is opening up, the market is trying to form a hypothesis; not this year because this year is a goner. Everybody knows that this year is going to be 4-5% negative GDP and corporate earnings are going to be very muted. People are trying to figure out what will happen next year and one interesting thesis people are building is that though the overall economy is coming down, there are a handful of companies, especially the leaders in specific sectors, whether it is telecom, banks or even in the sectors which are not doing well like airlines; the leaders in those sectors are going to come back very strongly because the competition is becoming very weak.

Hence, you will see the indices might not do very badly whereas the overall market might still not perform very well. But in the overall index of Nifty or Sensex, the top notch companies will continue to do alright and the base that has been formed, maybe another 5-10% downside at max, is where we see the market and the upside of course, everybody is trying to watch as the new data comes in.

Let us break up those points. You said that the Street has already priced things in but the government steps on the one hand are to induce demand but because of the lockdown, consumption has been hit. On the other hand, consumption as a space is witnessing contraction in demand. Do you see that this is actually weighing in on the economy in a big way at least in the medium term; three to six months before some sanity starts coming back? What is corporate India actually factoring in?
You are absolutely right. You have to divide this, say, pre-Diwali and post-Diwali, Our hypothesis is that Diwali probably would be an inflection point when we have real signs of whether the demand is coming back or not. At this point or maybe in the next three to six months, to imagine a world where demand will be very strong is foolhardy. It is not going to happen. People are scared of coming out of the house and people are scared of travelling; so how will demand take off? Any demand measure that you take which is very meaningful will not really make so much of a difference. What you have to ensure in this period is that the companies are sustaining themselves, the lenders are not calling for bankruptcies on the MSMEs, on the airlines, on the tourism side which are very vulnerable because if that happens then you have broken the supply chain.

So if we keep the supply chain constant for the time being and then you bet on the thesis that over a period of time this curve will flatten; hopefully the vaccine will come in, and even if the vaccine does not come in, I am seeing that globally the response of people has been very positive. People are coming back to normalcy and they are adjusting to real life. Demand will come back maybe in quarter four of this year; post Diwali is when we will watch out for the demand pickup. But as you rightly said, most corporates are very sober about the demand expectation for this year but the leaders in the segments are very clear. This is the year to strengthen the organisation, keep the supply chains intact and if you are able to do that well this year, from the next year, the companies that are leaders in the segment can actually have a brilliant year in that sense.