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inance and Investment Cell, SRCC interviewed Mr Samir Bhandari, Managing Director at Nomura. Mr Bhandari has over thirty years of experience in the field of finance. He has worked at JP Morgan, UBS, and the Bank of America. Mr Bhandari is a chartered accountant and a graduate of the Indian Institute of Management, Ahmedabad.


1. What do you think of the ‘W shaped’ market recovery speculation?

  • A month or so ago, most people were talking about a U, V or L. Only recently have we begun speaking about W. Ultimately, these are just terms that people use to make sense or very broadly categorize the shape of recovery

  • The question on the W-shaped recovery is really a question on the possibility of second wave infection and how successfully countries restart their economies whilst moderating that risk.

  • A W-shaped recovery is one where you see economic data recovering sharply from May lows, and then subsequently contracting again with a further outbreak of the virus or some other recessionary drag.

  • In recent weeks, you have seen rising infection rates in countries such as the US, Brazil and India—some of which are still arguably struggling with the first wave of infections. Most prominently this week, Hong Kong, which has been adding about 100 new cases a day in what many considers its ‘third wave’. And so the probability of a “W shaped” recovery has certainly risen—IHS Markit produced a report last week saying that by its estimates this probability had risen, globally, to 20%

  • https://ihsmarkit.com/research-analysis/rising-covid19-risk-w-shaped-economic-cycle.html

  • I think you are likely to see a divergence in recovery rates or ‘shapes’ across countries. If you look at Asia, Northeast Asia is more likely to recover quicker while Southeast Asia and India might struggle

  • As I mentioned earlier, one key factor is infection rates. In Northeast Asia, with cases under control, normalization of activity has been faster and mobility trends are back to pre-pandemic levels. By contrast, daily cases are making new record highs in emerging Asia (India, Indonesia and the Philippines), so these recoveries will likely be protracted. Even if their governments do not impose stringent lockdowns, public concerns and intermittent local lockdowns may result in a significant tapering of activity following initial bouts of pent-up demand

  • In addition, recovery in Northeast Asia is boosted by large exposure to the tech cycle—which has been accelerated by COVID-19 causing a shift towards digitalization, tech equipment and cloud services.

2. Which industrial sectors can be at the forefront of economic recovery?

  • One sector that looks particularly interesting is automotive. The automotive industry has been one of the hardest hit in this pandemic—with the current low starting base making it easier for a rapid recovery

  • In April and May, strict lockdown measures resulted in near-zero domestic sales for most automakers. Tata Motors, for instance, saw its sales drop 82% y-o-y in April-June. Consider the factors that were in play back then: 1) strict lockdown measures reduced mobility; 2) uncertainty around the economic outlook and the end of the pandemic, which compelled cautious consumers to delay the purchase of non-essentials

  • To flesh out how the auto industry could be at the forefront of an economic recovery, consider how those factors are overturned in a recovery scenario—making it prime for recovery.

1) An economic recovery must come because of a pick-up in economic activity (regardless of whether or not the pandemic has receded for good). This likely implies that lockdown measures have been eased to a degree, and that mobility has increased

2) An economic recovery suggests improved consumer sentiment and spending power

3) An additional and vital factor driving up demand is that individuals are likely to prefer private vehicles over public transportation. A recent survey by Deloitte showed that 77% of consumers want to limit exposure to public transportation, 70% want to avoid ride-hailing options and 79% intend to own a personal vehicle

  • To me, the automotive sector is prime to be at the center of a recovery

  • https://www.icis.com/explore/resources/news/2020/07/06/10526870/india-automotive-industry-sales-output-recovering-post-lockdown

  • https://www.thequint.com/tech-and-auto/car-and-bike/auto-sector-on-recovery-post-lockdown-detailed-report-passenger-vehicle-pre-owned-cars-and-two-wheelers


3. Has the worst of the crisis passed? Or will the coming economic situation be worse?

  • It is a tricky question to answer definitively—particularly because the ‘worst’ of the crisis entails much more than economic figures. It would also be foolhardy for us to think that we, as market practitioners, are knowledgeable to enough to project the trajectory of what, really, is a medical crisis before an economic one (although it certainly has translated into damning economic figures)

  • However, just looking at economics and narrowing the focus to on India, we at Nomura have used a number of proprietary indices to assess this situation. In short, we think that Q2, which has passed, will be the worst quarter of this year.

    • The indices point to a sharp GDP growth contraction in Q2, with a gradually recovering (though still negative) growth rate in the next 3 quarters.

    • Consumption has recovered from April lows, primarily driven by rural consumption. Investment, too, has picked up

    • Both aggregate demand and supply indications are off from their April lows. Demand, however, has taken a larger hit from the lockdown as consumers look to precautionary savings amidst rising income uncertainty

    • https://researchcdn.nomuranow.com/01/p/pub/Nomura_1018435.pdf?pid=1018435&appname=GRP&cid=YWJuWFBUNUViQ1U90&tid=exp=1595414193~acl=/*~hmac=f515120961b338ae8055fa1d91a9533cf14a1809b52d718d195cd82e98d22bf2


As I alluded to in the first question, the shape of the recovery hinges greatly on the control of the outbreak. Nonetheless, I am optimistic that the worst is beyond us in terms of an economic total standstill—now the question is more on the extent of the delay in terms of a return to normalcy.

  • https://researchcdn.nomuranow.com/01/p/pub/Nomura_1017896.pdf?pid=1017896&appname=GRP&cid=YWJuWFBUNUViQ1U90&tid=exp=1595465187~acl=/*~hmac=c51814426dcae882c1eae0685f0ebdcbf68a33dafae8c09fe65ea0307ef7484e


4. What do you think of the recent oil price shock?

  • Oil prices have certainly come a long way from April’s “Black Monday” where WTI crude futures, at one point, traded to a record low of -$40/barrel.

    • It was a totally new and unique situation, as with many other shocks in this pandemic. It was the perfect storm. COVID-19 concerns had smashed demand for oil, and there were mounting concerns of a glut in oil with insufficient storage space. And of course, it goes without saying, that speculative trading had a significant role to play in the aberration—beyond just weak fundamentals.

    • Oil prices have now stabilized significantly and recovered significantly from those lows

    • The 3 month implied vol for Brent has come down from a 103 high in March and 90 high in April to 36 today

    • OPEC+ has made significant strides to control supply

    • China, in May and June, has imported a record number of crude barrels as demand recovered

    • On the future of oil prices, it will be difficult to predict with certainty. A large driver of this will be demand, which is inextricably a function of how the pandemic situation plays out globally

  • Having said that, one more point is worth noting:

    • One must recognize that many key OPEC players struggle with oil below $40 a barrel. And it is in the group’s interests (no matter how fragile the alliance looks at times), and the interests of many other world leaders, to work together and ensure stability above this level.

    • Recall how Trump himself stepped in and rallied world leaders to broker the historic deal—ending the tussle between Saudi and Russia. All in, this is a lingering factor, which will continue to offer gentle support and stability in oil prices in the long run—regardless of how you spin it.

    • https://www.wsj.com/articles/opec-and-russia-led-oil-alliance-agree-to-increase-production-11594831436

    • https://oilprice.com/Energy/Energy-General/Can-Saudi-Arabia-Extend-The-OPEC-Deal-Until-2022.html

    • https://oilprice.com/Energy/Crude-Oil/Chinas-Oil-Buying-Spree-May-Be-Coming-To-An-End.html


5. Will global trade rebound rapidly once the pandemic is over, or will there be more focus on domestic manufacturing?

  • The answer to this is highly dependent on what a post-pandemic world will look like, and how long it will take for the pandemic to be ‘over’ in the absolute/total sense of the word (if at all)

  • In times of economic distress, like we are seeing now, it is in only natural for governments to look domestically—provide relief to local businesses, both small and large, to protect the livelihoods of its people through employment and shore up confidence. Any move to the contrary would all but worsen the plight of those already struggling and perpetuate a cycle of higher unemployment, a cautionary approach to spending, and economic slowdown.

The short answer is yes: the longer the pandemic drags on, the higher likelihood of protectionism and growing reliance on domestic manufacturing. In that sense, there will be more of a ‘focus’.

  • Now, will global trade remain low even after the pandemic is over? You have to also consider that globalization has brought, and still has, a lot to offer in terms of productivity boosts—which cannot be ignored

    • For instance, consider China and the significant advantages it still offers for remaining businesses to stay competitive. China’s labour force remains the arguably world’s largest and most cost-effective for low-mid end manufacturing. In addition, China huge domestic markets and its demand for exports is significant. Such factors will likely remain a boon/allure for global trade, even as countries wrestle with the bane of the pandemic.

    • Having said that, recent border tensions could be factor which gradually nudges India away from a reliance on China imports

    • https://researchcdn.nomuranow.com/01/p/pub/Nomura_1017785.pdf?pid=1017785&appname=Email&cid=T1phN1BFM2s3am890&tid=exp=1595474140~acl=/*~hmac=602104dc2617adaba9a101ddc62093e49e794924d91a48772ed7f06cddd7483b


6. As it is a black swan event in the stock markets, how long do you think it will be before SENSEX and NIFTY are back at Feb-March 2020 levels?

  • As with all black swan events, particularly a pandemic on a scale we have never seen before, the speed of recovery (particularly in asset prices) is open to speculation

    • I will not be able to say exactly when. However, what I will say is that, I personally do not think it will reach the same levels until we see the COVID curve under control.

    • Cases in India have been increasing at an increasing rate. And at present, there are just no signs of a visible slowdown in sight. Restrictions are, and will still likely be, held in place to a degree for the near future. As you will know, just about a week ago, it joined the US and Brazil as the only other country to surpass 1 million cases. Presentlly we are more than 2 million cases.

  • Earnings expectations are also overly optimistic given the bleak outlook on the COVID front. Take the following facts on NIFTY for instance:

    • NIFTY is trading at 19.8x 1y forward PE. The highest multiple in a decade.

    • While NIFTY consensus earnings estimates for FY21 and FY22 are already down 27% and 16%, respectively, since the start of FY20

    • The market is estimating in 21% earnings CAGR over FY20-22F. This compares to 6% CAGR over FY15-20, and is overly-optimistic

    • Yet, the equity indices trudge on higher. At the time of writing, NIFTY and SENSEX are both trading at only ~9.5% down from their Jan 2020 historic highs following a substantial rally over the last few months

    • Why? It’s hard to say for certain, but my sense is that it driven by global risk-on positive sentiment around economies re-opening and news surrounding a vaccine from a global concerted effort. Other factors include the fear of missing out, the outperformance in US tech and global central bank stimulus and policy support

    • Is it rational? Probably not. But then again, it need not be. It was John Keynes who famously said that “the markets can remain irrational longer than you can remain solvent”

    • Is it plausible to suggest that the NIFTY/SENSEX should recover from Mar lows? Perhaps. One could argue that that was overselling in a panic.

  • Is it plausible to suggest that NIFTY/SENSEX reach or break record highs again, just as India still struggles to contain the virus? Now that, becomes far harder to justify

  • In short, given the weakening fundamentals, I think we will not see the equity indices back at their highs until we see signs that the virus is under control in India.


7. Hospitality and tourism sector stocks have plummeted by an average of 40%. Is there any scope for recovery or do we need new disruptions in those fields?

  • Because hospitality and tourism are so dependent on tourists/travel, one needs to first make an assessment—how and when travel will resume to normal (if at all).

    • If travel resumes to pre-COVID levels, say in 3 years, then of course there is scope for these stocks to recover (eventually)

    • This point is highly debatable, but the general consensus is that COVID is here to stay for the foreseeable future—either until a suitable vaccine is released to the general public or the majority of the population develops a form of herd immunity on its own.

    • The timeline for this hazy. Even experts are hard-pressed to put a date on the release of the ‘promising’ vaccines often cited in news headlines.

    • Ultimately, the path of tourism-related stocks is difficult to determine, and I would be extremely cautious. It is therefore unsurprising that many have been perplexed with how to manage these stocks in the current environment:

    • Look no further than the great Warren Buffett himself. In Mar when the virus first roiled markets, Buffett reportedly purchased Delta airline shares after a 20% plunge. In May, Buffett flipped and offloaded those shares for a substantial loss.

    • https://www.marketwatch.com/story/heres-why-warren-buffett-made-a-huge-mistake-selling-his-airline-stocks-2020-05-26


  • However, assuming this is the new normal, or what we are seeing now is a semblance of the new status quo, then there will certainly be disruptions’.

    • For instance, hospitality and tourism-related stocks would depend more on the demand from domestic travelers and the patronage of locals as international travelers delay non-essential travel. They would have to adjust their businesses towards a different target client segment.

    • Other disruptions could include measures to cut costs and raise profit margins to compensate for the new-normal lower volumes. This could take the form of strategic management decisions on cutting less profitable business lines; this could also take the form of simple operational adjustments. For instance, creating more digital interfaces—e.g. self check-in options, robot service staff etc.

    • Yet another form of disruption, which might not necessarily invoke a ‘recovery’ in stock prices but is nonetheless essential to continuing operations, is those which are necessary to meet new-normal health and safety requirements


  • Legacy businesses will need to adapt their current operating models according to how the pandemic plays out. To answer the question more directly, the disruptions will be necessary to stay afloat and adapt to the changing environment, but will not necessarily bring about a recovery in the stock price to pre-COVID levels.

The interview was conducted via email.

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