Six things about Covid-19 the pundits got hopelessly wrong

On 23 March 2020, the central government ordered a lockdown to prevent the spread of the pandemic. One year has gone by since and the second wave of covid-19 is now on the anvil.

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Over the past year, truisms have been challenged and many expert predictions have gone for a toss. The future that we had probably envisaged in March 2020 has turned out to be a very different one.

As Samuel Goldwyn, an American film producer, is once supposed to have remarked: “Only a fool would make predictions—especially about the future." Not surprisingly, Goldwyn is part of the forecasting folklore, having been proven to be right many times over. Experts routinely get predictions wrong. Truisms turn out to be false. And the future doesn’t turn out to be the way we thought it would.

When the pandemic hit India and large parts of the world in early 2020, the prediction industry got its act going and confidently predicted quite a few things.

We were told that the spread of the pandemic would lead to people staying at home and, hence, lead to a fall in economic activity. A fall in economic activity would mean lower profits for the corporates. Nevertheless, the last two quarters have been the best in many years for the listed Indian corporates.

Oh, and since we continued to stay at home, home rentals were supposed to remain stable. Instead, the rental market has crashed in several big cities. This was another truism that has turned out to be totally wrong.

Further, we were told that the central banks of the world would print a lot of money to drive down interest rates in order to get the economy going. Money printing would then lead to gold prices rising as investors look for a hedge against the possibility of inflation. But that is not how things have turned out.

These and several other things have turned out to be quite the opposite of what was expected. Let’s look at them in detail.

Home rentals are down

The Indian real estate sector has been sluggish for many years now. While prices haven’t exactly fallen across the board, the days of double-digit returns are long gone. As of September 2020, the one year all India return on home prices, as per the Reserve Bank of India’s House Price Index, stood at 1.1%. This is the lowest since the index came into existence more than a decade ago. Home prices in cities like Mumbai, Delhi and Kolkata have fallen. Nevertheless, what has been more surprising is the fall in home rentals in some of India’s bigger cities. As Mumbai based real estate expert Vishal Bhargava wrote in November 2020 on Moneycontrol.com: “By the 1st week of November, rentals quoted by landlords were down 25% from pre-covid levels in Mumbai." For premium properties, rents were down anywhere between 30-40%. An October news report on Housing.com points out that rents in south Delhi had fallen by over 10% since early 2020.

An immediate reason for the fall in rents was obviously a crash in incomes as the lockdown was put in place. But there is a slightly long-term reason for this phenomenon as well.

Many single individuals working in bigger cities moved back to their hometowns from where they continue to work from home. Also, many expats working in the big Indian cities went back to their home countries and aren’t going to return any time soon. This has impacted rentals. The supply of rental homes has gone up with the demand falling. In fact, with the second wave of covid starting to spread, the work from home phenomenon is expected to continue, pushing back any hopes of a revival in the home rental market.

Gold prices are down

Gold was priced at around $1,515 per troy ounce (one troy ounce equals 31.1 grams) at the beginning of January 2020. The price of the yellow metal started rising from late March onwards as covid spread through large parts of the world and it became clear that central banks would get their printing presses going to pump prime the global economy.

Gold is the antithesis of the global financial system. A section of investors look to invest in it at times when they feel those who run the paper money system—central banks and governments—are abusing the trust that people have placed on them. The price of gold peaked at around $2,067 per ounce in early August. Since then, though, the price of gold has been falling, and it fell to $1,687 per ounce on 8 March 2021.

This has come as a surprise given that central banks of the world haven’t stopped printing money and, in fact, plan to continue to do it. At the same time, the governments of the Western world continue to spend more money in order to revive their economies. Hence, the fear of inflation remains.

One explanation for the fall in the gold price possibly lies in the fact that some of the money that could have been invested in it has moved to bitcoin, the most popular cryptocurrency.

In late July 2020, a few days before the price of gold reached a high of $2067 per ounce, the price of a bitcoin was a little over $11,000. Since then, the price of the cryptocurrency, thanks to its limited supply, has crossed $61,000 (as of March 21, it was quoting at $57,523).

Mutual funds mystery

Retail investors do not like to follow the law of demand. They typically like to buy assets (stocks, equity mutual funds, and real estate) when prices are near their peaks. Only once they have seen prices rise for a while are they convinced about investing.

Between April 2020 and February 2021, equity mutual funds have seen an outflow of ₹35,081 crore. In fact, equity mutual funds have seen outflows every month from July 2020 up to February 2021.

As stock prices have skyrocketed, with company earnings not justifying the high prices, a bunch of retail investors have booked profits and gotten out from mutual funds. This is unlike past trends, where retail investors continued to hold on to their mutual fund investments even after stock prices had reached their peak and were falling.

So, is it safe to say that the Indian retail investor has finally smartened up? Has the truism of retail investors being like lambs, who are slaughtered at the peak, turned out to be wrong? Not really, I’m afraid, if one takes into account the fact that the number of demat accounts has gone up by more than 26% between April 2020 and February 2021.

This could very well mean that investors are taking their money out of equity mutual funds and investing directly in stocks. It could also mean that newer investors seem to be investing directly in stocks rather than via mutual funds, where the possibility of gains is higher. None of this was obvious one year ago.

Of course, the price-to-earnings ratio of stocks is at all-time high levels. As of 19 March 2021, the Nifty 50 stocks had a price to earnings ratio of 40.2. The ratio as of 1 April 2020 had stood at 18.60. What this tells us is that stock prices have risen significantly faster than the overall earnings of companies.

But this doesn’t seem to have bothered investors, retail or otherwise.

Company earnings

While company earnings haven’t been able to keep pace with stock prices, that doesn’t mean that they haven’t been growing. In fact, for the three-month periods ending September 2020 and December 2020, listed Indian companies made record profits.

Data from the Centre for Monitoring Indian Economy (CMIE) shows that the profit after tax (PAT) for the three-month period ending September 2020 stood at ₹1.52 trillion, jumping a tad to ₹1.53 trillion for the three-month period ending December 2020. This was substantially more than the previous record of ₹1.18trillion for the three-month period ended March 2014.

This profit hasn’t come on the back of higher sales but on the back of cost-cutting, with bigger companies squeezing out better rates from their suppliers as well as contractors. Hence, it is basically the large companies that have benefitted at the cost of the smaller ones.

Book sales are up

2020 was a good year for book sales all around the world, rather surprisingly. The Publishers Weekly, an American trade weekly, reports that print book sales in 2020 rose by 8.2% to hit 750.9 million units. The 8.2% increase was the highest annual increase since 2010. Something similar seems to have played out in India.

HarperCollins Publishers India Ltd has seen overall sales jump 20% compared to the pre-covid level. As Ananth Padmanabhan, CEO of HarperCollins, puts it: “Our backlist (books published earlier than the year in question) has been selling well. This pattern applies to other publishers too, at least all those who have a good backlist. New books have been selling well too."

What is interesting is that the higher sales are not simply limited to print books. The sales of eBooks went up by 100% compared to 2019 and that of audiobooks by 60%, says Padmanabhan.

This is a trend that wasn’t really obvious at the beginning of 2020. It was largely expected that the popularity of over-the-top (OTT) streaming media would go up as people sitting at home would need entertainment. But no one expected people to go back to reading the way they have.

Inflation alert

Even though a bunch of investors believe that inflation is coming, very few economists have forecast inflation over the last one year. In fact, in the months following the spread of the pandemic, as retail inflation shot up, economists rightly pointed out that this was primarily because of supply chains issues which would get fixed soon.

Economists felt an overall rise in inflation wouldn’t happen simply because consumer demand had crashed and as the economy recovered, all the production capacity which had been lying idle could be put to use and supply would be able to meet demand.

The trouble was that no one had thought that oil prices would double between late March 2020 and now. Along with the increase in oil prices, higher excise duty on petrol and diesel has ensured that fuel prices in India have risen by more than 20% in the past year. This increase is now seeping into overall inflation. In fact, core inflation, which excludes food and fuel inflation, for the month of February stood at 6%. This is the highest since June 2018. Interestingly, core inflation in February 2021 was the second highest in the last five years.

It needs to be pointed out that the core index in this case does include petrol and diesel prices for vehicles, which are a part of the transport index. If we leave out petrol and diesel prices for vehicles along with other fuels for vehicles, the rate of inflation in February 2021 was at 5.5%, the same as it was in the two previous months. Hence, inflation has turned sticky.

This is not something that most economists had predicted.

To conclude, experts in the business of predicting things have got a bunch of things wrong. But that hasn’t stopped them from making predictions yet again about the future of the recovery. Currently, comparisons are once again being made to the Spanish Flu of 1918. The last big pandemic was followed by the roaring 1920s as the world entered an era of very fast economic expansion. Many economists and analysts already expect something similar to unfold in the 2020s.

The trouble is this is a very selective reading of history. The 1920s ended with the Great Depression of 1929, with economic growth contracting big time all across the world. The world came out of it only in the late 1930s as Western governments started spending a lot of money to get themselves ready for World War II, which would break out in 1939.

Hence, experts go wrong all the time. Why should this time be any different? As Canadian author Dan Gardner says in this regard: “At least 50% of pundits seem wrong all the time. It’s just hard to tell which 50%."

(Vivek Kaul is the author of Bad Money)