Economic contraction in India an opportunity for long-term investors: Wood

Chris Wood expects the recently concluded quarter to mark the bottom of the economic contraction

In adversity lies opportunity. The scale of economic collapse in India, according to Christopher Wood, global head (equity strategy) at Jefferies, should be seen as a dramatic opportunity for long-term equity investors.

Earlier this week, the contraction in Indian economy was the worst-ever in nearly four decades with the gross domestic product (GDP) for the April – June 2020 quarter of fiscal 2020-21 (Q1FY21) coming in at a negative to 23.9 per cent year-on-year (YoY). The 23.9 per cent YoY decline in Indian real GDP growth in Q1FY21, and 22.6 per cent YoY decline in nominal GDP growth, is as bad as anything the Wood has seen and expects the recently concluded quarter to mark the bottom of the economic contraction. The 47.1 per cent YoY decline in real gross fixed capital formation, he said, is also gobsmacking.

“Such dramatic statistics highlight two points. First, the precipitous nature of the way the lockdown was announced and implemented in late March was disastrous for the Indian economy. Fortunately, it was relaxed from June. Second, the Indian private sector, be it corporates or households, has not received anything like the scale of fiscal support, in terms of transfer payments and the like, seen in so many other countries,” Wood wrote in his September 3 note to investors, GREED & fear.

The fall in Q1FY21 GDP has seen most forecasters further cut India's economic growth projection for calendar year 2020 (CY20) and FY21. Those at Nomura, for instance, has slashed GDP growth projection to -9.0 per cent YoY in 2020 (vs -5 per cent previously) and -10.8 per cent in FY21 (vs -6.1 per cent earlier). Pranjul Bhandari, chief India economist at HSBC, too, expects growth to remain negative until December 2020, before turning slightly positive in early 2021 (that too led largely by a weak statistical base). “Despite our forecast for a positive 7.2 per cent GDP growth next year, GDP is only likely to return to pre-pandemic levels in early 2022,” Bhandari believes.

That said, Wood still remains cautious on the Indian financial sector given the developments around moratorium and its implication for banks and non-bank finance companies (NBFCs).

“To GREED & fear, the critical issue in the next 12 to 18 months is the extent of the damage done to the loan portfolios of banks and NBFCs, in particular their consumer loan portfolios. In terms of recovery plays, GREED & fear would rather focus on auto related and real estate plays,” he wrote.

And the markets, too, acknowledge this. At the bourses, the Nifty Bank index, a gauge of the performance of key banking counters, has underperformed since March 23 when the markets his their recent low. While the Nifty50 has moved up around 50 per cent since then, the Nifty Bank index has gained 37 per cent during this period, ACE Equity data show.

Meanwhile, Finance Minister Nirmala Sitharaman has asked banks to put in place by September 15 a loan restructuring schemes to rescue all viable business units affected by the Covid-19 pandemic. Banks have to approve their own loan restructuring scheme, which was allowed by the RBI in August for all types of borrowers – corporate, MSME, and personal loan segments.