The Indian economy was passing through a very turbulent stage in the last u0007 months. With GDP growth less than u0001 % the domestic markets witnessing stress across sectors, the overall consumption story has definitely slowed down. With domestic consumption slowing down, the overall growth in global markets was what most Indian companies were looking at exploiting. In order for the Indian growth to get back on track export of goods and services was a major source of overall growth.
There has been a big disparity being witnessed with the Indian economy and the stock market, whereby the Indian economy is growing at a very slow pace, however the stock markets are at an all- time high.
What has been happening during the Indian stock markets is a significant amount of capital has been invested in the Indian stock market via the FPI ( Foreign Portfolio Investment) route. FPI inflow in the Indian equity markets was almost USD trillion.
Large part of this interest in the Indian market was due to the fact that world economy was relatively stable and growing well. In financial terminology, the environment was rather a risk- on environment, wherein flow of capital to risker assets like equities, especially equities in the emerging markets was most probable choice for most fund managers.
With the outbreak that began in the central Chinese city of Wuhan that has killed over . . people in China and infected more than u0001 , u0001 . . globally; the World Health Organization called the outbreak an emergency for China, but stopped short of designating it a global emergency. The MSCI World Index, which captures large and mid- cap representation across u0007 . developed markets, has fallen almost u0007 % in the past two weeks. The sell- off has been sharper in the MSCI Emerging Markets Index which shed . . u0001 . % . Last time when such an epidemic had hit the world was way back in u0007 . . . , the SARS ( Severe Acute Respiratory Syndrome) when close to . . . people in . countries died of the previously unknown respiratory illness that originated in southern China. During SARS, Asia- Pacific airlines lost USD . . billion in revenue terms or around . % of annual traffic in u0007 . . . . Global cost from SARS was estimated at USD . . billion or . . % of world GDP in u0007 . . . . Damage to the economies of China and Hong Kong was pegged between % and . % , while total East Asian losses were estimated at USD u0007 . billion.
What one needs to keep in mind is that since u0007 . . . , the world GDP and overall economy is . x larger thereby the overall impact that Coronavirus would result in could well be in the range of - . % of world GDP. The impact of the virus is not only for the savvy investor on the street but also the common man on the street in terms of financial implications.
China is a very important trading partner of India and Indian companies import a vast majority of the goods from China. With this hit on the Chinese economy and most companies in China remaining shut, the overall dynamics of the Indian industry would set to hurt if this lock jam in the Chinese economy lasts for a few more weeks. India being the consumption capital of world, a sudden void in the market would definitely hurt the overall consumption and Indian economy. Smallest of consumption items are imported from China and are big hit in the Indian market.
Some of the major sectors that would face a challenge in terms of growth if the lock jam in the Chinese markets continue for the next couple of weeks are as follows: u001f Retail and consumption The retail and small consumption sector is highly dependent on imports from China. White goods and smaller appliances and retail products are imported from China and sold in the local markets. If the problem persists over a period of time the overall spending of the Indian consumer would get impacted as the void would be very difficult to fill on an immediate basis by the Indian retailers.
u001f Pharma and Drug Companies The Indian pharma industry is highly dependent upon APIs ( Active Pharmaceutical Ingredient) that are imported from China. Almost . u0001 % of all APIs in the Indian pharma industry are imported from China. Most APIs are imported from Hubei province in China close to Wuhan the epicentre of the virus. Thereby it could result in a situation of shortage of drugs and medicines for the Indian market.
u001f Agro Commodities A large part of the Indian agro that are exported to China, a prime example would be chilli exports to China, total exports of chilli is around INR u0001 , u0001 . . crores a year, a vast majority of it is exported to China. With the Chinese markets affected a large part of the export would not happen thereby also having an impact of the overall forex earnings.
u001f Electronic and Telecommunication A large part of the equipment in the electronics and telecommunication industry is manufactured in China.
If the lockout persists over a period, delayed imports or lack of supplies would lead to a loss in overall growth of the sector.
u001f Export of Cut Diamonds A large proportion of the cut diamonds which are polished and finished in India are exported to China.
With a . % fall in export of diamonds in the first fiscal, the export market of diamonds would be hit further.
With these challenges, the Indian companies also have a great opportunity to stamp its presences on the u2018 Make in Indiau2019 program. Indian chemical companies who compete with the Chinese companies have a good opportunity to capture market share. Companies in the chemical and dye intermediaries have the biggest opportunity to capture market share.
Keeping this backdrop in mind, investors should keep a cautious view on equities as this could lead to a rather global correction in equities at large. Gold as an asset class would continue to perform well keeping this risk- off and uncertainty in mind. Foreign exchange as an asset class would also turn volatile. Swiss Franc considered a safe haven currency slipped to a monthu2019s low, thereby echoing the nervousness in the overall financial markets. Thereby investors in these turbulent times should look at companies in the chemical sector which could possibly capture share from Chinese imports and should look at an asset allocation other than equities as well.
Farzan Ghadially is an Investment Banker by profession and a management faculty Send your feedback to farzan@ financekafunda. com The views expressed in this column are the individualu2019s and donu2019t represent those of the paper.
Corona virus significant impact on global and Indian economy FINANCE KA FUNDA Farzan Ghadially Coronavirus fears rattle in financial markets and would significantly impact on Global Growth Coronavirus a big threat to overall global growth, with the virus spreading to other countries other than China. Last time when SARS a similar virus had hit in 2003, the Chinese GDP was USD 1.6 trillion. Today the Chinese economy is almost 10 times larger with a GDP of USD 14.3 trillion and per capita GDP in excess of USD 10,000.
