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Manglam News Letter

Post-lockdown Impact – Which sectors will bounce back, Which will take Time

The economy was in poor shape even before COVID 19. The govt has little leeway to provide large stimulus. The government earns about $60-70 billion a week from taxes. Imagine what a hit a 5-week lockdown will have. The size of the Indian economy is about $3 Trillion. In some scenarios, it is predicted that Govt could take a hit of nearly $1 Trillion. Inequality has already sharpened.

The gap between rich and poor has further increased. The government needs to concentrate on mass health and mass welfare. If not, 200 million people could sink into poverty. The government must explore printing currency (Quantitative easing), but there are limitations here. It has side effects like inflation, etc. Rich countries have more leeway for such quantitative easing .The government must concentrate on grabbing more capital from outside and do reforms to enable that.

Moreover, real estate in India is sitting on a huge inventory with a huge cost-of-carry as it is highly leveraged with low margins. Unsold inventory is considered as an appreciating asset, but might turn out to be a flawed view. The market was already overdue for a huge reset, which will be accelerated by the pandemic. In addition to this, the companies can consider to set their own smaller spaces for work and encourage WFH more among employees.

Looking at the financial markets, there will be value destruction and value creation in different companies in the same sector. High Debt low margin companies will find it difficult which indicates risky or unscrupulous management. However, high Debt high margin companies could be rewarded, but caution needs to be exercised. And companies with no debt are best rewarded now.

Considering the current situation of the forex market, the government should buy as much oil as possible, as this price may never be seen in the future of the oil industry again. Furthermore, as the western economies are more battered and the Indian economy is less battered so far, there is more liquidity coming in. That’s why there is a rally in the market. This scenario could change depending on the spread of the disease in India.

Ashwani Manglam

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