Anticipating structural changes post-Covid

We caught up with these five fund managers to find out what changes they expect in the economy and business in the aftermath of Covid-19, which sectors/areas are likely to be most impacted and which will bounce back sooner than others.

Navneet Munot, ED & CIO, SBI Mutual Fund
"Fully-open economies without virus fears are still a distant dream and consequently the outlook on growth, earnings and markets stays hazy. India's policy response has been encouraging in that it not just aims to address the immediate distress but also carries a vision for the long term. In the wake of this crisis, global firms will look to diversify supply chains as they weigh reliability against efficiency. India's policy intent is to fight for a position of strength in the changed world order. Continued focus on factor reforms - land, labour, capital and enterprise - as well as judicial and administrative reforms is encouraging, as is the continued thrust on uplifting the masses. We must leverage our social capital built during the last few months and the power of data and technology to accelerate our transformation.

"For the global economy too, this crisis may turn out to be a blessing in disguise. Years of ultra-accommodative monetary policy had failed to revive wage inflation and investment activity, while rising wealth inequality had been an unwelcome side effect. This crisis has set the stage for unprecedented fiscal response to help revive blue-collar jobs and wages and aggregate demand. Deflation could eventually give way to inflation. Infrastructure creation and pick-up in the investment cycle can help kickstart the next upcycle for emerging economies. Also, as healthcare and virtualisation of processes become the centre-points of public policy everywhere, this could turn out to be a Y2K moment for India."

Jinesh Gopani, Head of Equity, Axis Mutual Fund
"The COVID incidence has forced us to rethink the growth outlook. We are reassessing the sectors that may get hurt for the longer term. While it is easier to notice problems everywhere, right from domestic stories to exports, the leaders of the next cycle are always difficult to predict, which may very well be same sectors/stocks.

"The strategy that forms a core part of our investment philosophy for the year is 'survival of the fittest'. Even before the news on the coronavirus and the subsequent shutdown, we were concerned about the quality and consistency of earnings that were coming through amidst the weak economic background. Fast forward to April, as we see earnings downgrades across the board, companies that have the ability to withstand the long-term revenue vacuum will be winners as the cycle recovers.

"The pandemic has raised a lot of questions on existing business models and a lot will change once things come back to normal. We believe that only businesses which have the ability to adapt to these changing times will come out as winners over the medium to long term. Incrementally, we are looking at sectors where earnings predictability is high as businesses have taken a massive hit with respect to continuity. As long-term investors, we are also looking for businesses and management that, we believe, have the right to win in the next two years."

Harsha Upadhyaya, President and CIO - Equity, Kotak Mahindra AMC
"Global manufacturing landscape could get materially realigned in the post-COVID era. India can benefit from potential diversification of manufacturing and supply chains in that situation, provided it can offer comparable or better terms versus other competing countries in South and South East Asia. We expect global companies to further diversify their manufacturing bases out of China, given increased concerns about further deterioration in political and trade relationships between the US and China and overdependence on any particular country, region or supplier for raw materials, intermediate or finished goods. It is a changed world in every sense. There is no sector or business that is completely insulated and unaffected during the current crisis. The businesses that continue to focus on costs, cash conservation and that explore new ways to run the business through digital/non-physical modes as far as possible will most likely be able to weather the storm. The competitive landscape in every industry and consumer preferences in most product/ service categories is likely to witness significant changes over this period. Businesses that prepare themselves to face unforeseen circumstances and nonlinear impacts will most likely emerge winners over the medium to long term.

"The normalisation process of the economy and business environment will improve only gradually. It could take a few months to a few quarters, depending on the impact. We believe that the essential goods/ services and consumer-staple segments are likely to witness lesser adverse impact and also see faster normalisation than the discretionary demand-oriented sectors."

Sankaran Naren, ED & CIO, ICICI Prudential AMC
"The impact of the pandemic is likely to be largely cyclical in nature. Companies with weak balance sheets or weak business models are likely to come under significant stress in the current downturn.

"In the services sector, wherever possible, there could be a modest increase in workforce shifting to work-from-home permanently. As a result, the demand pick-up for commercial real estate may be much more gradual. Hotels/restaurants, travel and tourism, luxury are pockets which are likely to be under strain for some time. Meanwhile, non-services sectors such as manufacturing, construction are unlikely to be impacted.

"In terms of sectors, we are overweight on power, telecom, pharma, and metal and mining. Banking and finance, consumer non-durables, autos (ex. auto ancillaries) are sectors we are underweight on."

Mahesh Patil, CIO - Equity, Aditya Birla Sun Life AMC
"COVID-19 has been a black-swan event for the economy and markets. Going forward, we could see some structural changes, such as

• Increased work from home (WFH) and reduced travel
• Rising use of new technologies such as automation, robotics and 5G
• Increased digitalisation, for example, fintech
• Change in consumer preferences in terms of entertainment, shopping, travel, etc.
• Rise of e-commerce, which can lead to the disintermediation of supply chains
• Global companies looking to diversify manufacturing outside China
• Shift from unorganised to organised, wherein strong companies will become stronger

"Sectors such as travel and tourism, hospitality, retail, and aviation may get impacted the most by changing consumer preferences. Sectors such as four-wheeler auto, infrastructure and capital goods, and real estate and construction have been severely impacted due to the lockdown and any recovery will only be gradual. Banking and financials should also be under some pressure due to slower growth and elevated NPA cycle.

"Rural-focused sectors such as agro-chemicals, twowheelers, etc., should do well as a large part of the fiscal stimulus was directed towards rural, the rabi harvest has been good, and a normal monsoon season is expected. Telecom should benefit from increased data requirements due to WFH and increased digitalisation. Sectors such as pharma and consumer staples also haven't really seen much impact on demand and should continue to do well. Sectors such as low-ticket consumer discretionary (e.g., household appliances) and utilities should bounce back fairly quickly after the lockdown ends. Within financials, insurance should recover faster as customers seek more protection cover. Sectors such as IT and metals may also bounce back as global growth is expected to recover faster due to the large stimulus measures announced globally and these sectors also benefit from rupee depreciation."

Manish Gunwani, CIO, Equity Investments, Nippon India Mutual Fund
"This is the biggest economic contraction that India has experienced since independence. In fact, this is for the first time in known history that India's growth rate could be lower than the growth rate for the rest of the world. Certain businesses like aviation, hospitality and retail will be most impacted. The SME sector will be severely impacted, although the government support will minimise the damage.

"Businesses are dealing with remote work arrangements, securing supply chains and cutting cost everywhere. Each sector will have a different shape of recovery based on the nature of business, income elasticity of demand, extent of policy response, and balance sheets of companies and their various stakeholders. Companies will be cautious in putting the capacities and incurring fixed cost in a post- COVID World. Also, new innovative ways to work, including remote working, would be adopted by businesses particularly in services areas like capital markets.

"Businesses which are likely to be least impacted include telecom, utilities and within financials, insurance.

"There are various themes which are being talked about, including significant rise in online sales, import substitution where India can attract manufacturing FDI, and preference towards ownability. However, the biggest theme across sectors is consolidation and reduced competition. Even before COVID, strong and larger companies were gaining market share across sectors. Now with COVID, this trend will further strengthen. There will be fewer players in each industry. Those who survive this crisis will have super advantage."