Impending Recession: Where Should You Invest?

17 Dec 2019

The recent macro-economic indicators of the economy have cemented the fears that the country is headed towards a recession. Other factors such as the slowing revenue generation, unemployment and cost cutting in the automobile sector, poor demand for FMCG, rising NPAs in the banking sector, bad debts piling up in loan repayments, etc. are all the revolving factors around the central truth.

While these factors are not strong enough to call a recession, economists feel that India could be in the ‘growth recession’ phase.

Growth Recession or Proper Recession

Growth recession is the phase in the economy when the economic growth is slow, but not slow enough to qualify as a recession. Despite not being a proper recession, in this phase, unemployment spreads and the economy becomes slack.

In India, the Gross Domestic Product (GDP) growth rate for the July-September quarter was at 4.5%, and in the April-June quarter, it was at 5%. When three consecutive quarters show a contraction in the country’s GDP, it is a state of recession as per the definition in economics.

Consumption Expenditure

India’s total consumption expenditure has currently seen considerable growth in household consumption at a rate of 7.8% from 6.1% in 2011-2014. But there has been a drastic fall in private consumption expenditure to 3.1% from 7.2% in March 2019 has largely affected the current financial slowdown. This is caused by low personal spending, causing lower output and a fall in employment.

The economy comes to a standstill due to lower production and prices of products deflate. This whirlpool of slowdown constantly circulates in the society that leads to the ultimate financial shock and economic stagnation. Another major aspect of the country’s economy is its investments which have also reduced considerably. This has led to little or no infrastructural development, shut down of small businesses, lack of research and innovative activities and no technological development.

The NPAs and Banking Crisis

At the heart of the financial crisis are non-performing non-banking financial sectors (NBFCs) that have piled up bad loans and non-performing assets (NPAs) over time. IL&FS claimed a bad debt of loans up to Rs 1 lakh crores. Punjab and Maharashtra Corporation Bank (PMC) have failed to claim their outstanding business loans that have added up to crores. This in combination with goods and services tax (GST) policies has strangled businesses as they earn less revenue and added tax liability.

The unhealthy financial meltdown is also due to collaterals being used by companies to get loan approvals when their financials are deteriorating. The best option is to de-leverage (to sell assets and pay off debts) instead of adding to more borrowings. This is also closely related to the overhyped real estate prices.

Can Real Estate Help?

Lower land prices will improve the economy. Historically our country has seen a close relationship between land and capital prices. Between 1998 and 2003 there was a steep fall in interest rates due to a fall in land prices. Again between 2003 and 2013, there was a steep rise in both interest rates and land prices. From then on the interest rates corrected but land prices are still high and should be corrected.

To expect a “Bull” market in the future, land and capital costs should below along with the reasonably priced labor market in India. To obtain such a market there needs to be market volatility in the future.

What Has Happened To The Stock Market?

The consumption of slowdown has led to a high price of consumption stocks. Capital reallocation from high priced to domestic cyclical stocks will be held to improve the country’s economy. Besides, the government should recognize the underlying value of the Public Sector Unit (PSUs) businesses. In the global scenario, India is a haven during the trade war between the US and China. But it is different in the case of energy stock prices as stability in oil prices is necessary for both the stock and bond market in India.

The election mandate of the complete majority of a single ruling party makes investing in equities a safer bet for investors. The market is supposed to be run by the corporate earnings with more weight given to indices.

So, Where Should You Invest?

Now is the time to invest in niche segments with care and after much consideration. Certain unusual sectors, that have record-high earnings in the current market, are insurance sectors. Companies like HDFC Life, Prudential ICICI, etc do not have any non-performing assets (NPAs) any insolvencies or liquidity problems.

Certain Asset Management Companies (AMCs) like Reliance Nippon and HDFC AMC are at new heights with soaring stock prices. Many paint companies like Berger Paints and Asian Paints are riding high in this volatile market. Footwear companies have reported a 30% increase in their consolidated profits. Bata and Relaxo are expanding their operations countrywide by setting up more stores. There is a huge demand for cables has led to the financial stability of companies namely Polycab and KEI industries.

The share prices of Avenue Supermart and Trent are soaring in the stock market. Trent intends to invest in some good brands namely Star Bazaar, Zara and Westside.  

Key Takeaways

There is a public notion that when the stock market crashes, though the prediction happens well in advance, yet it cannot be corrected and avoided. The market and investors get tested in a financial crisis, market correction happens and investors realize their actual worth. In such cases it is always advisable to take help from an investment advisor who can guide you through such symptoms in the markets and can help you gain profit through the downturns as well.

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