covid-19 impact analysis...• the rbi delivered an unscheduled 75bps rate cut to bring repo rates...
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COVID-19 Market ImpactINDIA17 April 2020
April 2020
This commentary provides a high level overview of the recent economic environment, and is for information purposes only. It is a marketing communication and does
not constitute investment advice or a recommendation to any reader of this content to buy or sell investments nor should it be regarded as investment research. It has
not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing
ahead of its dissemination. The performance figures displayed in the document relate to the past and past performance should not be seen as an indication of future
returns. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. HSBC Global Asset Management accepts no liability for
any failure to meet such forecast, projection or target.
2
The coronavirus
outbreak itself Macro backdrop Policy support Valuations
Upside
factors
• Downward trajectory of
new cases across the
world and in India
• Lockdown in India and
other control measures
start working in favour to
contain the outbreak
• A relatively insulated
Indian economy (low but
positive earnings growth
and reasonable GDP
growth prior to the
outbreak
• Countries taken fiscal & monetary policy actions to mitigate the impact
• RBI has cut reverse repo rate by 75bps to 4.4% followed by 25bps cut in repo to 3.75%. Scope for further stimulus
• Hugely improved relative
valuations for many risky
asset classes (e.g.
Equities, Debt (e.g.
Corporate Bonds)
Key factors to consider in the current environment
Source: HSBC Global Asset Management, March 2020. Any views expressed were held at the time of preparation and are subject to change without notice. Any forecast, projection or target
contained in this presentation is for information purposes only and is not guaranteed in any way. HSBC accepts no liability for any failure to meet such forecasts, projections or targets.
Key
risks
• Rapid spread of
coronavirus pandemic
• US is now a source of risk,
India lockdown fails to
reduce virus spread
• Containment measures
reduce productivity
• Increasing uncertainties in
global growth outlook
• India’s growth facing a
transitory but significant
impact
• Policy easing is positive
but has limitations
• Policy adjustments are
more constrained in
Eurozone, Japan and
some other nations
• Extended recession due
to a prolonged closure of
businesses
• Bonds offer low
prospective returns for
long-term investors
Source: Bloomberg, Global data as at March 2020, India data as on 17 April 2020.
3
• There are a myriad of possible outcomes, but the risk of global recession rises as pandemic takes hold
• The questions now are how long and how deep it is likely to be
• If policy stimulus ramps up significantly, perhaps we could avoid the worst-case scenario
A reasonable
middle ground
• COVID-19 remains present but under control, people adjust to the “new normal”
• Subdued global growth
• Mild global recession risk despite policy easing
• U-shaped recovery
Market-positive
scenario
• A relatively mild outbreak
• Temporary hit to global growth (a FYQ4 - 2020/FYQ1 – 2021 event)
• Policy easing could help
• V-shaped rebound
Worst-case
scenario
• A global pandemic
• Very damaging to growth
• Policy only able to provide a partial offset
• A marked global recession
TENSION B E T W E E N T W O FORCESPolicy effectiveness Spread of the virus
What are the possible scenarios for the global economic impact?
Source: HSBC Asset Management India (HSBC AMC), March 2020.
Any views expressed were held at the time of preparation and are subject to change without notice. Any forecast, projection or target contained in this presentation is for
information purposes only and is not guaranteed in any way. HSBC accepts no liability for any failure to meet such forecasts, projections or targets.
4Source: IMF, Bloomberg, GDP data as at December 2019.
Any views expressed were held at the time of preparation and are subject to change without notice. Any forecast, projection or target contained in this presentation is for information purposes only
and is not guaranteed in any way. HSBC accepts no liability for any failure to meet such forecasts, projections or targets.
Share in global GDP and GDP growth (% CY2019)
“Slow and steady”
growth
Economic impact of COVID-19 hard to gauge
Indian economy had been showing signs of stabilisation prior to the outbreak
24
.7
16
.3
5.9
4.5
3.4
3.2
3.1
2.3
2.1
2.0
2.4
6.1
0.90.5
6.1
1.2 1.20.0
0.9
1.5
0
1
2
3
4
5
6
7
0.0
5.0
10.0
15.0
20.0
25.0
30.0
USA CHINA JAPAN GERMANY INDIA UK FRANCE ITALY BRAZIL CANADA
GD
P g
row
th %
GD
P s
hare
%
Share of GDP%
GDP growth %
• Economic activity is slowing due to COVID-19
• The macro outlook is uncertain
5
• India economic fundamentals (consumption) attempting a rebound prior to the outbreak
• China economic activities contracted year-on-year in January and February
• The outlook is uncertain. Key determining factors to monitor are:
(i) COVID-19 spread and how economically disruptive the containment measures are;
(ii) Implications for labour markets and financial systems
Source: (Left chart) Nomura, March 2020. (Right chart) CEIC, Bloomberg, HSBC Global Asset Management, March 2020.
Any views expressed were held at the time of preparation and are subject to change without notice. Any forecast, projection or target contained in this presentation is for information purposes
only and is not guaranteed in any way. HSBC AMC accepts no liability for any failure to meet such forecasts, projections or targets.
Economic impact of COVID-19 hard to gauge
For now, we are in a low information environment…
India Consumption REVISIONS TO CHINA GROWTH FORECASTS (PP)*
-25
-20
-15
-10
-5
0
5
10
15
20
25
30
35
2015
2015
2016
2016
2017
2017
2018
2018
2019
2019
2020
Industrial productionReal retail salesFixed asset investment (YTD)
China economic activities contracted
-80.0
-60.0
-40.0
-20.0
0.0
20.0
40.0
60.0
80.0
100.0
120.0
Ap
r-16
Jun
-16
Au
g-1
6
Oct-
16
Dec-1
6
Fe
b-1
7
Ap
r-17
Jun
-17
Au
g-1
7
Oct-
17
Dec-1
7
Fe
b-1
8
Ap
r-18
Jun
-18
Au
g-1
8
Oct-
18
Dec-1
8
Fe
b-1
9
Ap
r-19
Jun
-19
Au
g-1
9
Oct-
19
Dec-1
9
Fe
b-2
0
Consumption components - GDP (% y-o-y, 3mma)
Passenger vehicle sales Diesel consumptionConsumer credit Rural agri wages2 wheelers sales Tractor sales
6
…But reinforcing this
COVID-19 is challenging these views
• India’s Nifty index
valuations are implying
10% / 17.5% earnings
growth in FY20/21.
• FY22 is likely to see a
favourable base and with
economy normalising, the
earnings growth trajectory
is likely to see a
meaningful improvement.
• The collapse in crude
prices should work
towards easing both
fuel and core inflation
pressures, depending
on the level of the pass-
through to retail prices.
• RBI expects food prices
would soften as harvest
has been healthy.
• Low inflation allows RBI
to remain proactive.
• RBI has given rate cut
(4.4% repo), (reverse
repo 3.75%) and
continues with the
accommodative stance.
• RBI has announced
many other progressive
measures.
• Scope for a recovery
in profits - already
tentative signs of a
pickup in earnings
data
• Nevertheless,
downside risks from
rising expenses and
possible economic
shocks
Slow but
steady growth
Little
inflation risk
Policy
support
Modest profits
scenario
Core current themes
Key macro views
Source: HSBC AMC, April 2020.
Any views expressed were held at the time of preparation and are subject to change without notice. Any forecast, projection o r target contained in this presentation is for information
purposes only and is not guaranteed in any way. HSBC AMC accepts no liability for any failure to meet such forecasts, projections or targets.
7Source: RBI, Bloomberg, as on 16 April 2020.
Any forecast, projection or target contained in this presentation is for information purposes only and is not guaranteed in a ny way. HSBC AMC accepts no liability for any failure to meet
such forecasts, projections or targets.
• The RBI delivered an unscheduled 75bps rate cut to bring repo rates to multiyear lows of 4.4%, 90bps cut in
reverse repo rates on 27 March ’20 and followed up with 25bps cut in reverse repo on 17 April ‘20 to bring reverse
repo rates down to 3.75%. RBI continues maintained accommodative stance.
• RBI has also announced liquidity measures of Rs.3.74 Lakhs Cr along with debt moratorium option
• The Central government on 26 March 2020, announced a COVID-19 relief package worth Rs. 1.7 trillion (USD 23
bn or ~0.8% of FY20E GDP)
• Resolution timeline for stressed assets extended by 90 days in the wake of covid19 on 17 April ‘20
RBI and GOI - Unlocks all possible measures in a lockdown!
3.25%
3.75%
1440
7125
12194
13047
0
2000
4000
6000
8000
10000
12000
14000
16000
18000
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
9.00
10.00
Ma
r-0
2
Oct-
02
Ma
y-0
3
Dec-0
3
Jul-
04
Fe
b-0
5
Se
p-0
5
Ap
r-06
Nov-0
6
Jun
-07
Jan
-08
Au
g-0
8
Ma
r-0
9
Oct-
09
Ma
y-1
0
Dec-1
0
Jul-
11
Fe
b-1
2
Se
p-1
2
Ap
r-13
Nov-1
3
Jun
-14
Jan
-15
Au
g-1
5
Ma
r-1
6
Oct-
16
Ma
y-1
7
Dec-1
7
Jul-
18
Fe
b-1
9
Se
p-1
9
Ap
r-20
RBI Repo rates vs Equity market (Nifty 50 TRI)
RBI Repo Rate (LHS) RBI Reverse Repo Rate (LHS) Nifty 50 (RHS)
4.5%4.4%
~4.9x
Repo/Reverse repo @ multiyear lows
~2.3x
Repo
Reverse Repo
Reverse Repo
Repo
8Source: RBI, Bloomberg, as on 17 April 2020.
Any forecast, projection or target contained in this presentation is for information purposes only and is not guaranteed in a ny way. HSBC AMC accepts no liability for any failure to meet
such forecasts, projections or targets.
RBI has followed-up with measures within three weeks of its comprehensive policy actions taken in March ’20.
These measures are expected to give additional relief to the financial system particularly for sectors such as mid
to smaller NBFCs and real estate which are currently facing challenge in terms of getting access to liquidity from
the banking system.
Key Highlights - RBI’s additional measures announced on 17 April ‘20
• 25 bps of reverse repo rate cut while repo rate and other policy rates remain unchanged
• INR 500 billion of TLTRO for NBFCs announced to begin with
• INR 500 billion of special refinance window to NABARD, SIDBI and NHB
• WMA (ways and means account) for state governments increased by 60% from earlier 30%
• 10% provision to be made on the loans under moratorium
• LCR (Liquidity Coverage Ratio) to be brought down to 80% from 100%
• Banks to not announce dividends for FY20 until further review by RBI
• Resolution timeline for stressed assets extended by 90 days in the wake of covid19
RBI - Unlocks more measures in April ‘20
9
Cut rates by 50 bps
Announced an
unprecedented stimulus plan
(2.5% of GDP)
Cut rates to 0.1% and
restarted QE
The ECB announced an
extra EUR750bn bond-
buying programme
• China - more targeted
policy measures are
possible
• HK - highly
expansionary budgets
• The PBoC has eased
monetary policy,
including cutting RRR
Australia, New Zealand, Singapore,
Indonesia, Thailand: announced
stimulus packages
Pre-emptive monetary policy easing are
seen in the Asia Pacific region
Doubled coronavirus
rescue package to
USD80bn
Cut rates by 50 bps
Major world
economies use
“all appropriate
policy tools” to
support growth.
Low inflation gives policy makers
the ability to continue supporting
growth.
Policy options available to policy
makers include:
Monetary easing
• Interest rate cuts and
commitment to asset purchases
• Zero interest loans from public
sector to corporate sector
• Liquidity measures for banks
Fiscal stimulus
• Large-scale, deficit financed
fiscal stimulus
• Tax relief for corporate sector
• Temporary tax cuts
What policy action has been taken by countries?
A concerted effort by policy makers is needed to shore up growth and confidence
Source: HSBC Global Asset Management, Bloomberg, as at March 2020, India numbers as on 17 April 2020.
Any views expressed were held at the time of preparation and are subject to change without notice. Any forecast, projection or target contained in this presentation is for information
purposes only and is not guaranteed in any way. HSBC accepts no liability for any failure to meet such forecasts, projections or targets.
BOJ ramps up asset
purchases
RBI cut Repo Rate by 75 bps to
4.4%. Reverse Repo rate is
reduced by 115 bps to 3.75%.
US Fed Rate cut to
set the range
between 0% - 0.25%.
10
Does the market volatility provide a good opportunity
to buy growth assets?
Source: HSBC Global Asset Management, HSBC Asset Management India, data as at March 2020.
Any views expressed were held at the time of preparation and are subject to change without notice. Any forecast, projection or target contained in this presentation is for information
purposes only and is not guaranteed in any way. HSBC accepts no liability for any failure to meet such forecasts, projections or targets.
• While the environment is very challenging, there is a silver lining. We believe a more cautious strategy is warranted in the short term with , but maintain a pro-risk stance as relative valuations for risky assets such as equities have hugely improved.
• Our equity investment philosophy is based on the basic premise that in the long term, money is made in segments where there is a clear sustainable competitive advantage created over time.
Asset class
• We tend to play the theme of market consolidation phase resulting in structural market share shift for firms.
• Market corrections provide great opportunities to buy ideas at mispriced valuations.
• One such theme is that of profit pool migration and concentration of profits. Within a sector, we see that the profit pool is getting concentrated with market leaders, a trend which is expected to continue going forward.
Equity themes
• This theme will play out in all sectors but would be most visible in fragmented sectors like Financials, Airlines, Real Estate, NBFC, etc. COVID-19 led disruption in the economy will affect all sectors but not uniformly.
• We believe sectors like Food and beverages, Personal products, Health care, Telecom, Utilities, Broadcasting etc., would be less impacted.
• Whereas sectors like Airlines, Travel, Entertainment, Hospitality, Construction, Manufacturing etc. would be impacted much more.
Focused equity sectors
• We would utilize the opportunities provided by sharp market corrections to enter and / or add to ideas that form basis of our investment philosophy and identified themes as above.
• Overall, we believe that companies with market leadership, niche product positioning, scale and competitive advantages will tend to benefit more and are likely to outperform across cycles. These opportunities are sector as well as market cap agnostic in nature.
Current equity market portfolio strategy
11
Four ways to handle market volatility
12
0
1
2
3
4
5
6
7
• Over-the-top market pessimism often presents opportunities to buy companies with good prospects
• Examples: 2003 global SARS outbreak and 2008 – 2009 global financial crisis
Any performance information shown refers to the past and should not be seen as an indication of future returns.
Source: Bloomberg, Nifty 50 PB ratio, data as on16 April 2020.
1. Keep calm and don’t overreact… market downturns may create significant opportunities!
Average 3.5x
2.5x2003
SARS
2008
Financial
crisis
2011
European
sovereign
debt crisis
China growth
concerns
COVID-19?
US – China trade
tension
India
Demonetization
+ GST
India political
issues and shift
NSE Nifty 50 – Price to Book ratio (PB)
13
0
10000
20000
30000
40000
50000
60000
70000
Ja
n-0
0
Oct-
00
Ju
l-0
1
Ap
r-0
2
Ja
n-0
3
Oct-
03
Ju
l-0
4
Ap
r-0
5
Ja
n-0
6
Oct-
06
Ju
l-0
7
Ap
r-0
8
Ja
n-0
9
Oct-
09
Ju
l-1
0
Ap
r-1
1
Ja
n-1
2
Oct-
12
Ju
l-1
3
Ap
r-1
4
Ja
n-1
5
Oct-
15
Ju
l-1
6
Ap
r-1
7
Ja
n-1
8
Oct-
18
Ju
l-1
9
Ap
r-2
0
2. Missed opportunities can be costly… do not try and time the market!
• Sharp declines have been followed by significant rebounds
• Selling during volatile periods can result in losing the chance of recovery in the long-term
Performance information above refers to the past and should not be seen as a guide to the future. Hypothetical analysis is for illustrative purpose only and should not be relied on as
indication for future result. Source: Bloomberg, ACE MF, S&P BSE Sensex TRI, as on 16 April 2020.
Feb'00-Sept'01:
Tech bubble
Sensex TRI lost ~ (54%)
Sep'01-Jan'08: Bull phase
Sensex TRI rose ~779%
Jan'08-Mar'09:
Sub-prime crisis
Sensex TRI fell ~ (60%)
Mar'09-Dec'10:
Bounce back
post sub-prime crisis
Sensex rose ~152%
Jan'11-Dec'11:
European crisis
Sensex TRI fell ~ -(24%)
Jan'12-Feb'15:
Post European crisis
Sensex TRI rose ~100%
Nov'16 - Dec'16
Demonetisation
Sensex fell ~(7%)
Jan '17 - Dec '18
Post Demonetisation
Sensex rose ~40%
Dec'18 -
Feb'19
Geopolitica
l jitters in
the sub-
continent
Sensex fell
~(3%)
Mar'19-Jan‘20
Corporate tax cut,
trade deal
Sensex TRI rose 19%
Jan‘20 -
Mar‘20
Corona
virus
spread
Sensex
TRI fell
~(29%)
S&P BSE SENSEX – TRI performance across big events
?
14
89%
100%
82%
84%
86%
88%
90%
92%
94%
96%
98%
100%
102%
0
50
100
150
200
250
300
350
400
450
3-year rolling returns 5-year rolling returns 7-year rolling returns 10-year rolling returns 15-year rolling returns
Total number of positive returns* (LHS) Total number of negative returns^ (LHS) Positive investment periods (RHS)
3. Staying invested is key to successful investing
Source: BSE, CRISIL Research, Data as on December 31, 2019, Past performance may or may not sustain, past performance does not guarantee future performance.
S&P BSE Sensex – Positive / Negative returns
rolling performance (no of positive / negative return periods)
• The longer the investment time frame, the less likely a negative return
• Include growth assets in your portfolio regardless of market sentiment
Over time the chance of a
negative return declines
Notes:
Monthly rolling returns for respective holding periods since 1979. For instance, in case of 15-year monthly rolling returns, there will be 307 return periods. The first return period will be June 1979 to June
1994 and last return period will be December 2004 to December 2019.
* Positive returns – The number of investment periods during which returns have been positive. For example, where investment returns have been computed for a 15-year rolling period, 307 months
offered positive returns (profits), the number of positive returns period = 307
^ Negative returns – Number of investment periods during which returns have been negative. For example, where investment returns have been computed for a 5-year rolling period, 33 months offered
negative returns (losses), the number of negative returns = 33.
15
4. Diversify to achieve a smoother ride
Across all risk profiles there are solutions that meet your
investment needs.
Any performance information shown refers to the past and should not be seen as an indication of future returns. Source: ACE MF, data as at March 2020.
...can be one of the
best-performing the
following year
One of the worst-
performing asset
class in one year...
Single asset class
performance can vary
significantly from year
to year
Diversification means investing in various asset classes at
the same time – allowing your investment to be less
exposed to large fluctuations than if invested in a single
asset class
Asset class / indices 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019S&P BSE IPO Index - TRI -9.4 43.5
Brent Crude 96.7 21.6 13.3 3.5 -0.3 -48.3 -36.4 55.8 17.7 -20.4 25.3
Silver 52.0 70.0 9.4 14.1 -24.1 -15.9 -9.5 19.2 -3.2 -0.8 22.6
NIFTY 50 - TRI 77.6 19.2 -23.8 29.4 8.1 32.9 -3.0 4.4 30.3 4.6 13.5
S&P BSE Large Cap - TRI 85.1 18.0 -24.0 29.7 8.1 33.3 -2.7 4.8 31.6 3.7 12.2
Crisil Composite Bond Fund Index 3.5 5.0 6.9 9.4 3.8 14.3 8.6 12.9 4.7 5.9 10.7
Crisil 10 Yr Gilt Index -8.7 3.1 1.9 10.7 -0.7 14.1 7.4 15.0 0.0 6.0 10.5
S&P BSE 200 - TRI 90.9 17.8 -26.0 33.2 6.1 37.4 -0.2 5.4 35.0 0.8 10.4
S&P BSE 250 LargeMidCap Index - TRI 90.4 17.9 -25.3 32.8 6.3 37.8 0.3 5.3 36.1 0.3 10.2
NIFTY 500 - TRI 91.0 15.3 -26.4 33.5 4.8 39.3 0.2 5.1 37.7 -2.1 9.0
Crisil 1 Yr T-Bill Index 2.9 2.8 6.4 8.1 5.9 8.6 8.2 7.3 5.8 6.9 7.6
Crisil Liquid Fund Index 5.1 8.2 8.5 9.0 9.2 8.2 7.5 6.7 7.6 6.9
Gold-India 24.4 23.3 32.1 12.5 -6.3 -6.1 -7.2 11.2 5.3 7.8 3.3
S&P BSE SME IPO - TRI -13.5 -0.9
S&P BSE Mid-Cap - TRI 110.9 17.7 -33.2 40.6 -4.0 56.9 8.7 9.3 49.9 -12.5 -2.1
S&P BSE Small-Cap - TRI 130.8 17.3 -41.6 35.0 -9.7 71.1 7.7 2.7 60.8 -22.9 -5.9
S&P BSE 250 Small Cap - TRI 135.4 17.0 -40.5 39.1 -13.0 58.8 3.3 3.3 57.1 -23.7 -8.4
16
Diversify to match your risk profile
Source: HSBC Global Asset Management. For illustrative purposes only and does not relate to any investments. This is purely hypothetical.
If you want to reduce market volatility choose a
portfolio with higher fixed income products
allocation.
If you want to buy the dip,
consider a portfolio with higher
equity products allocation.
Across all risk profiles there are solutions that meet your
investment needs. 100%
Equities
100%
Fixed
Income
17
Disclaimer
This document has been prepared by HSBC Asset Management (India) Private Ltd (HSBC) for information purposes only and should not be construed as an offer or solicitation of an
offer for purchase of any of the funds of HSBC Mutual Fund. Expressions of opinion are those of HSBC only and are subject to change without notice. It does not have regard to specific
investment objectives, financial situation and the particular needs of any specific person who may receive this document. Investors should seek financial advice regarding the
appropriateness of investing in any securities or investment strategies that may have been discussed or recommended in this report and should understand that the views regarding
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18