In more ways than one, the Covid-19 induced global recession is more severe than the great recession during 2008-09. The size of the stimulus package announced across the globe is far more than in 2008. The job loss is more severe. Some sectors are hit harder than others. In all likelihood our understanding of a financial crisis might be challenged.
Investors have started to look out for safe haven investments which includes betting on sectors considered recession proof industries. The recession-like conditions have led most investors to rebalance their portfolio. Most of them are going for traditional safe-haven assets. But is it wise to do so?
Let’s look at some sectors and evaluate if the Covid-19 factor may require a change in strategy.
With the rise in COVID-19 cases and the nationwide lockdown that ensued, the financial markets globally went into a tailspin. But it is noteworthy that the recovery since March was led by pharma stocks. Healthcare industry and the healthcare professions are expected to deliver big time.
Prime Minister Narendra Modi in his address to an industry body earlier this month, said that India has sharply increased its manufacturing of PPE kits and is exporting them. Besides, the healthcare sector will be among the foremost beneficiaries of the stimulus package announced or even planned in the future to fight the ongoing pandemic.
However, this does not mean the sector has not borne the brunt of the disruption in economic activity due to the virus outbreak. India imports a variety of medical equipment and products from China. Ever since the outbreak, the industry is unable to import raw materials and necessary electronic components from China.
While healthcare is a traditional recession-proof sector, the COVID-19 induced downturn is of a different nature. There is still considerable uncertainty as to how the pandemic will pan out in the future. Despite these factors, the trend in the pharma stock suggests that it is already the most trusted during a pandemic.
Food and Restaurants
Brick-and-mortar food businesses were facing effects of an economic slowdown even before the pandemic hit. With a country-wide lockdown and safety considerations even for delivered food, the food and restaurant industry that had a turnover of Rs. 4 lakh crore and directly employed over 7 million people has been hit severely by the coronavirus outbreak.
Recent reports suggest that 40 percent of all restaurants and cloud kitchens might be permanently shut due to the government imposed lockdown. Post the lockdown period, hygiene protocols in dine-outs may raise the cost by 4-5 per cent and social distancing norms might see restaurant occupancy falling by at least 20 per cent.
The restaurants in Mumbai and Delhi that make about half of the organised restaurant business in the country are likely to see a slow rebound when the lockdown is lifted as both these cities are red zones and make for more than 30 per cent cases.
While food delivery has faced a softer blow as compared to the restaurant industry, the National Restaurant Association of India has estimated a 70 percent fall in the food delivery business.
Therefore, the food and restaurant sector may not be a safe bet during this recession.
Freight and Logistics & repair sector
Travel and tourism sector is currently facing an unprecedented crisis. However, the freight and logistics sector has always been considered recession proof. Although logistics has been categorised as an essential service, operators –especially inland logistic companies — have reported disruption in business owing to the shortage of workers and the health environment checks (HEC). Prominent rating agencies expect the sector to struggle in the next 6 to 9 months but recover in FY22.
The freight and logistics sector is better placed for a recovery but it might be a classic case where it may not behave as a recession proof industry. Rating agencies are anticipating a contracting in this sector too.
Consumers tend to go for repairs rather than making big investments like buying a car or new AC. Therefore, the ancillary sector tends to maintain its growth during a recession. While the Indian automobile sector was already facing a massive demand shortfall, the Covid-19 pandemic might make it worse. However, the repair sector like the tyre sector may not witness a huge impact.
The Covid-19 induced recession calls for a change in traditional strategy. One, the impact of the outbreak on businesses is yet to be understood completely. Second, much depends on the states where the companies are based. Cities such Mumbai and Delhi are facing more disruptions than others. Therefore, a cautious approach towards identifying the recession proof industries is required. For obvious reasons, the healthcare sector seems to have been a trusted sector during these times but non traditional sectors like telecom and IT sector may be a better choice than food, restaurant or even logistics sector. In this period marked by economic uncertainty when even traditional recession proof industries are contestable, the need for expert advice is amplified. For instance, Tata Capital Wealth offers the services of experienced and trusted wealth managers who can help you navigate your investment strategy in these times.