Several Ways Coronavirus Will Impact Retail – From Luxury to Chinese Shopping Tourism

The coronavirus disease 2019 (COVID-19) - an epidemic that could become a global pandemic - emerged in a densely populated manufacturing and transport hub in central China and has since spread to 29 other countries and regions carried along by Chinese New Year and international travel.

In contrast to the Western Africa Ebola emergency of 2013-2016 – more deadly but less contagious, arguably more isolated, and eventually contained in part by richer countries putting money into Africa – COVID-19 presents larger, more interdependent economies with management dilemmas. It has also surfaced at a time of eroding trust within and between countries – with national leadership under pressure from growing societal unrest and economic confrontations between major powers.

•   China’s economic growth expected to slow to 4.5% in the first quarter of 2020 – the slowest pace since the financial crisis, according to a Reuters poll of economists.

•  "Global oil demand has been hit hard by the novel coronavirus," says the International Energy Agency.

•  Factory shutdowns are slowing the flow of products and parts from China, affecting companies around the world, including Apple and Nissan.

Falling oil demand

China is the world’s biggest oil importer. With coronavirus hitting manufacturing and travel, the International Energy Agency (IEA) has predicted the first drop in global oil demand in a decade.

Disruption to commerce

The shortage of products and parts from China is affecting companies around the world, as factories delayed opening after the Lunar New Year and workers stayed home to help reduce the spread of the virus.

As China grapples with the coronavirus, the economic damage is mounting around the world.There are around 70,000 confirmed cases of COVID-19, the new coronavirus that emerged in Wuhan, China, in December and is spreading around the world.

Businesses are dealing with lost revenue and disrupted supply chains due to China’s factory shutdowns, tens of millions of people remaining in lockdown in dozens of cities and other countries extending travel restrictions.

A recent commentary speculated that Apple would be the “canary in the coalmine for the economic impact of Covid-19, the novel coronavirus wreaking havoc in China and increasingly beyond. While it is true that Apple has a very strong reliance on Chinese manufacturers for its supply chain, it is still ultimately a brand manufacturer that has a lot of finished goods in its supply chain, which can theoretically weather at least the month’s worth of disruption that we’ve seen so far. And should that disruption extend beyond a month, it will still take a few more months before most consumers really feel it.

Most luxury brands would be pummeled if they did not have a well-articulated strategy for how to reach the Chinese market. For many, China is not just a source of growth, it is the only source of growth. Upscale Chinese consumers have a high appreciation for global luxury brands, and perhaps even more-so than Chinese-native brands serving the middle class, luxury brands coming into China are feeling the immediate impact of closures and social distancing. This impact will hit global luxury brands in Q1 2020. A month of lost sales, or longer, is unlikely to be made up in time to help a quarter, or possibly the year.

Luxury companies including Burberry, Ralph Lauren, Coach, and Capri Holdings—which owns Michael Kors, Versace, and Jimmy Choo—have already warned of lost sales amounting to tens or hundreds of millions of dollars due to the spread of coronavirus. Now a survey of top luxury executives estimates the total hit to the industry’s sales could reach as high as €40 billion ($43.4 billion).

The main concern is business in China, where sales are plummeting due to widespread store closures and shoppers hunkering down in their homes. The survey estimates as many as 10 million to 15 million products originally destined for China could go unsold, forcing companies to redirect those items to other parts of the world. Luxe outerwear company Moncler, for instance, said on a recent earnings call with investors and analysts that it had frozen shipments to Greater China and sent them instead to regions such as Europe.

Just as luxury retailers have made it a core strategy to penetrate the Chinese retail market, there are many Chinese brands and sellers that have a core strategy of selling to Western markets. A good example: Shein, long-time lurker on Pinterest. The company operates fairly opaquely, with only a few hints that it is headquartered in China. Their US site offers total business as usual currently, with recent new blog posts and no mention that operations may be disrupted by measures protecting against Covid-19. The impact won’t be felt immediately – most of these companies slow-boat their shipments to Western markets anyway – but give it a month, and the impact will start to be felt.

Cities like Melbourne, Milan, Mexico City, Munich and Las Vegas all have seen enough Chinese shopper tourism that retailers there actively advertise their services and Chinese shopper friendliness. That has undoubtedly come to a screeching halt in the last month. Most companies can absorb that much impact, but should the travel restrictions into and out of China continue, the long-term impact of the lack of Chinese tourist shopping will start to hit home in cities that have benefitted from the activity in the past.

Finally, a month of factories sitting idle means a month less of inventory in the pipeline. For most Western retailers, this won’t impact the shelves next week, but it could impact inventory any time over the next month to six months. Should disruptions continue past the current month, Western consumers will certainly see impact at the shelf as soon as April or May for those retailers that rely heavily on Chinese imports.

Latest Updates

A viral outbreak that began in China has infected more than 80,000 people globally. The World Health Organization has named the illness COVID-19, referring to its origin late last year and the coronavirus that causes it.The latest figures reported by each government's health authority as of Wednesday in Beijing:

— Mainland China: 2,715 deaths among 78,064 cases, mostly in the central province of Hubei

— Hong Kong: 81 cases, 2 deaths

— Macao: 10 cases

— South Korea: 1,146 cases, 11 deaths

— Japan: 861 cases, including 691 from a cruise ship docked in Yokohama, 5 deaths

— Italy: 323 cases, 11 deaths

— Iran: 95 cases, 15 deaths

— Singapore: 91 cases

— Thailand: 40 cases

— United States: 57 cases

— Taiwan: 31 cases, 1 death

— Australia: 23 cases

— Malaysia: 22

— Bahrain: 26

— Vietnam: 16 cases

— Germany: 17

— United Arab Emirates: 13 cases

— United Kingdom: 13

— France: 14 cases, 1 death

— Canada: 11

— Kuwait: 12

— Iraq: 5

— Philippines: 3 cases, 1 death

— India: 3

— Spain: 6

— Russia: 2

— Israel: 2

— Oman: 2

— Austria: 2

— Lebanon: 1

— Belgium: 1

— Nepal: 1

— Sri Lanka: 1

— Sweden: 1

— Cambodia: 1

— Finland: 1

— Egypt: 1

— Algeria: 1

— Afghanistan: 1

— Croatia: 1

— Switzerland: 1

— Greece: 1

Latin Manharlal Group

Image Courtesy: Google

Rural Economy – Expectations from the Union Budget

More government expenditure: On infrastructure, especially in rural areas: Economists lay greater emphasis on increasing government investment in capital expenditure to (a) generate demand in the economy and (b) create a base for future growth. More investment should be made in rural infrastructure, including roads, housing, health and education, for both short-term gains and long-term growth. It is the rural economy that has been hit the hardest in recent years due to various economic shocks and slowdown.

Higher minimum wages: The last time the central government raised the national minimum wage was in 2019. The hike was by a mere Rs 2 - from Rs 176 to Rs 178 - while an expert committee set up by it to fix a national floor rate proposed Rs 375 per day (Rs 9,750 per month) as the statutory minimum, irrespective of sectors, skills, occupations and rural-urban locations, for a family of 3.6 consumption units, and an additional house rent allowance of up to Rs 55 per day for urban workers.

Expanding MGNREGS: in addition to raising minimum wages, the allocation for the MGNREGS should also be increased to provide 100 days of work - raising it from the current average of about 45 days. Experts also advocate a similar employment guarantee scheme for the urban poor.

Expanding PM-KISAN scheme to landless agriculture labour: The PM-KISAN scheme was launched in the 2019-20 budget (in February 2019) for the small and marginal farmers, with retrospective effect, just ahead of the general elections and was later expanded to cover big farmers too. It envisages an annual income transfer of Rs 6,000 in three installments.

A Universal Basic Income (UBI) scheme: The concept of a universal basic income (UBI) was first mooted by the former chief economic adviser Arvind Subramanian in his Economic Survey of 2016-17. The basic premise was: "A just society needs to guarantee to each individual a minimum income which they can count on, and which provides the necessary material foundation for a life with access to basic goods and a life of dignity".

Latin Manharlal Group

Auto Sector Budget Preview

Reduction in Goods, Service Tax (GST) Rates: Topping the expectation list is the reduction in GST rates from 28% to 18% on vehicles. Apart from reducing the GST on vehicles, the auto inc is also requesting the government to reduce GST on auto parts from 28% to 18%.

Scrappage Policy: One of the key demands of auto inc is the implementation of scrappage policy as it will spur demand without putting any additional burden on the government exchequer. It will also help remove old vehicles which are causing major pollution problems. SIAM has urged the Finance Ministry to consider announcing an incentive-based scrappage policy.

Incentivising R&D Spend: To encourage domestic R&D and testing, it is important to provide exemption on import duty on auto component prototypes. Also retaining of a weighted tax deduction on R&D expenditure is critical.

MSME Definition: Include Wholesale and Retail Trade and Repair of Motor. Vehicles and Motorcycles in the MSMED Act. The subsidies and incentives received under the MSME division will provide much-needed relief to automobile Dealerships which provide 25 lakh direct employment to people near their homes without displacing them.

Reduce GST on EVs and custom duty on lithium-ion batteries: From the Electric Vehicles sector point of view, the previous budget announced was positive for the electric vehicle industry. Players in the electric vehicle space are expecting to see further reforms, incentives, and infrastructure that will drive EV consumption in India.

Technology Development & Acquisition Fund: To face headwinds of changing vehicle norms and to match international standards, a fund needs to be created for supporting R&D and indigenous technology development, especially in light of the technological disruptions in the automotive industry, is witnessing.

Reduction in GST Rates for Used Cars To 5%: The used car business occupies 1.4 times the size of the new car market, accounting for 5-5.5 million cars per annum with a turnover of over Rs. 1.75 Trillion. According to the Federation of Automobile Dealers Association (FADA), authorized dealers account for only 10-15% of this trade, which is also the organized sector thus paying taxes.

GST Refunds and Repayments process: Huge funds of the corporate sector are blocked in tax refunds such as GST refunds, or pre-GST CENVAT credit, or earlier sales tax regime.

Latin Manharlal Group

Cement Sector – Budget Expectations

Here’s an overview of the Cement sector and its wishlist for Union Budget FY2020-21.

India is not just the second largest manufacturer of cement world over, but also the second largest consumer of it. This certainly makes the sector crucial for the India growth story. Its growth is derived from the housing sector’s growth and the sector is also an indirect beneficiary of the government public spending on infrastructure. While the government has been consistently working to revive the realty (housing) and infrastructure sectors – it has not yielded much returns till date. This is despite an increase in the budget allocation for infrastructure projects and Pradhan Mantri Aawas Yojana (PMAY). With the Housing for All target by 2022 coming closer, growth in the sector is yet to pick up pace. And, this background brings with it a wishlist for the Union Budget FY2020-21.

With government efforts yet to get materialised, some earlier indicators of growth are visible for the cement sector. Some revival visible in public infrastructure has resulted in some green shoots and this is likely to boost cement demand growth for FY2021 to 6-7% against 1-2% for FY20.

As stated earlier, the cement sector is an indirect beneficiary of higher government spending and any measures in the budget to improve the spending augurs well for the sector. However, a mere increase in budgetary allocation for the road and railway sector is not enough to boost cement consumption. Prior experience suggests that the government, despite allocating higher budgetary resources, has cut the spending to accommodate the fiscal deficit math. As a result, going by industry expectations – what will sustainably lead to higher cement consumption is higher private sector participation along with improved terms under the BOT model.

The industry also expects that various measures already taken for the real estate sector are likely to benefit cement consumption. But this needs to be monitored consistently. Broadly, cement manufacturers expect around 10-15% increase in budgetary allocation for key ministries such as roads and railways. However, cement players opine that the overall spending might be higher as these ministries have resorted to higher borrowings (EBR) to support its CAPEX programme.

Also, an increase in budgetary support to the transport ministry and NHAI is expected to Rs 940 billion and Rs 450 billion, respectively.

At present, customs duty on packaging for use in bagging cement is 10% and the industry is expecting reduction in customs duty to 5%.  This will help the cement companies benefit from lower packaging cost aiding in improvement in operating margins.

Latin Manharlal Group

Budget 2020: Infrastructure Boost

•           Ms Sitharaman is expected to announce a plan in the budget to invest Rs 105 lakh crore in infrastructure over the next five years. By then it hopes to make India a $5 trillion economy, compared with $2.8 trillion now, government sources have said.

•      To boost domestic manufacturing, the budget is also expected to increase import duties on more than 50 items, including electronics, electrical goods, chemicals and handicrafts, targeting about $56 billion worth of imports from China and elsewhere.

•          The infrastructure companies sought finance from the Centre for affordable housing and real estate sectors. They claimed that any funds allocated to these sectors in the upcoming Budget 2020 would spur the consumption of cement and steel.

•          Increase in allocation towards schemes such as Pradhan Mantri Gram Sadak Yojana (PMGSY), Pradhan Mantri Awas Yojana – Gramin and  Atal Mission for Rejuvenation and Urban Transformation (AMRUT) will be positive for the infrastructure sector (Roads, Cement; etc.)

•          Increasing allocation to defence shall also boost order books of the infrastructure and capital goods companies. Moreover, the increase in allocations towards large infrastructure projects such as bullet trains, Bharatamala, Sagarmala, Smart Cities, Inland Waterways development, etc will be positive for the infrastructure players.

•          In Budget 2020, the central government should release stuck up funds which were meant for infrastructure sectors to bring back ‘buoyancy’ in the economy, the infra players told FM Sitharaman.

•          Terming the cross-subsidy and transmission charges as deterrents, infra players said that these have been making renewable energy more expensive than thermal power. They suggested that in Budget 2020, the central government should provide exemptions so that cement and other core sectors can play a pivotal part in boosting renewable energy.

•          The centre should also provide exemptions from cross-subsidy as well as transmission charges for clean energy units to be set up beyond factory boundaries.

•          The cement players have asserted that they can even set up 12GW to 15 GW of renewable energy projects provided there is a positive ambience in the country.

•          Infra players have also recommended that the centre must further fine-tune the Income Tax Act, duties and lending rates.

Real Estate Wishlist for Forthcoming Budget 2020-21

·         A fiscal stimulus to the real estate sector will have manifold affect on 269 allied industries.

·         Liquidity issue, Industry status, Extension of the Sunset Clause of SEZ and restructuring of realty sector loans amongst other policy changes, the real estate leaders list down their expectations that can help boost the real estate sector.

·         The industry has been demanding a restructuring of loans or a one-time roll-over in case of the stressed assets at the options of banks.

·         The sector needs a one-time subvention scheme and restructuring of realty sector loans

·         The sector has long been demanding a single window clearance mechanism

·         The government had introduced a sunset clause for SEZs in 2016. According to the clause, only an SEZ unit that commences operations on or before March 31, 2020, shall be eligible for an income tax holiday. Considering the challenges faced by the real estate sector in the last couple of years, there is a need for the government to extend the date and provide the required relief to SEZ units and developers

·         The government needs to push the well-capitalized NBFC’s to extend liquidity to the sector and look at a resolution mechanism for the stressed NBFC’s and banks to enable seamless credit flow for developers and homebuyers.

·         The additional tax benefit for home loan interest announced in the previous budget now takes the tally to 3.5 lacs (Section 24 (b) & 80 EEA) for homes worth 45 lacs circle value. The same needs to be extended for homes costing upto Rs.1 crore to benefit the middle-class families residing in Metro cities

·         The additional income tax benefit for home loan interest which was announced for home loans sanctioned between Apr 19 – Mar 20 needs to be extended for a minimum of 3 more years.

·         he period of exemption from levy of tax on notional rent, on unsold inventories, needs to be extended to 3 years from 2 after receiving the Occupation Certificate. This is keeping in mind the slow reduction in unsold inventory levels and lackluster demand for real estate assets.

Latin Manharlal Group

Importance of Asset Allocation

Market participants have seen extreme volatility in Indian capital markets. There have been many incidents both global and domestic which have led to a fall in the indices. At this point, we are facing a Nationwide Contagion Effect.

Some of the factors contributing to the market turbulence are as follows

• US-China Trade War

• NBFC Crisis following the IL&FS fiasco in domestic market

• Prolonged slowdown in critical sectors of the economy like Auto and Realty

• Asset quality issues, NPA’s which haunt Public Sector Banks

• Corporate governance issues, Audit failures and credit rating agencies failure to red flag critical issues

In this era of VUCA – Volatility, Uncertainty, Complexity and Ambiguity, our main focus is on risk mitigation and protection of principal. Return Of Capital rather than Return On Capital is the underlying motive. We will be exposed to Market Risk at all times, however Individual Company Risk can be Mitigated by Diversification & Asset Allocation.

The two main traditional assets are Debt and Equity. The asset classes are evaluated with respect to liquidity, safety, yield, image, appreciation and growth. Equity asset class is high risk high reward where there is possibility of high appreciation. In the case of debt returns are stable and tend to be lower with high degree of safety

A proper Asset Allocation based on the clients Risk profile is the most suitable and apt method.

Our Aim is to allocate risk to different Instruments / Assets.

Based on our research, The following Data shows us how diversification and Strategic Asset Allocation would have benefited the client. (All data shown below are as on 30 October 2019)

Market has shown a positive trend in the recent Months. There have been many positive aspects as well like Reduction in tax rates for Corporate Firms (22% for Domestic Companies & 15% for new manufacturing companies).The central bank cut the repo rate by 25 bps  to 5.15% and the reverse repo by 25 bps to 4.90% (100 bps = 1 per cent).

Based on this Allocation, the Investor has managed to diversify his risk to different categories of Asset Classes. There is equal Allocation to each Asset Class.

Based on this Allocation, The investor has been aggressive and is willing to withstand the Risk of Market Volatility. He has been able to generate Positive returns in all Periods.

Gold acts as a Hedge during Uncertain events. Gold has a negative Correlation with the traditional Asset Classes (Debt & Equity).The demand for gold increases during inflationary times due to its inherent value and limited supply.

Increased Allocation towards Debt helps the Investor earn Stable Return as compared to Equity & Gold. Returns maybe lower due to lower Returns.

Conclusion: Asset Allocation is Important for every Individual. Market Risk & Business Risk is something which every Investor goes through. Thus our main aim is Capital Protection and Risk Aversion. During Volatile Periods like now, we fear about Capital Erosion. Thus a hedge can be done via investing in different Asset Classes with low Correlation with each Other.

Latin Manharlal Group