Firstly, if anyone says they had predicted this market fall, well they are probably lying to you. Most of us knew that the valuations were expensive, didn’t we? but the hope of earnings revival year after year kept the mood buoyant for investors. Further, the global market mood was upbeat led by strong growth by the largest economy in the world and early signs of recovery in Europe. However, things took a dramatic turn from mid-Feb. The number of coronavirus cases not only continued to surge in China but also saw a spike globally leading to WHO terming it a PANDEMIC which is mind you alarming.
So let’s try to answer some key questions on investors mind currently.
Is such a sharp correction in Indian markets justified?
Remember how everyone around tried to convince us that 10,000 is a very strong support for Nifty. Well not anymore as the level was broken seamlessly. As much as we want to believe that Indian markets have become more resilient because of higher mutual fund inflows, we still remain closely linked to global equity indices. So, if the global markets fall, we follow suit. Currently, the sentiments are affected globally as this pandemic has led to lockdown of cities, states, or even countries. Therefore, we are no longer talking about the growth slowing; in fact, the entire supply and demand situation (except for essential services) has come to a standstill. In such a scenario wherein markets globally were trading with premium valuations, and no clear visibility of things normalizing in a foreseeable future has led to the sharp correction.
To put it in other words, markets were trading higher than historical averages in anticipation of higher economic growth and in that case investors were willing to pay a premium, however instead of growth improving, we are probably looking at a scenario of a sharp de-growth hence the discount in valuations.
Will it fall more?
To give the answer in one word, yes. Globally, governments and central banks across the world have taken several steps to reduce the economic impact of coronavirus. The Indian government has been quite proactive in announcing the lockdown given the state of our healthcare infrastructure. However, in a developing economy like India where millions of workers depend on daily wages to survive, the impact on the economy would be far higher than expected. Both the centre and state governments are doing their bit by ensuring food and shelter for the migrant workers. However, we believe things would take longer than expected to normalize as despite the lockdown the number of cases continues to surge. In our view, this will force the government to extend the lockdown even further, or in parts.
Therefore, the longer the lockdown continues; the stimulus package would also have to increase proportionately. This means the government will have to borrow more and spend to get the economy back on track. Considering the current scenario wherein our fiscal deficit is already higher (if you consider off-balance sheet financing), borrowing more puts us at a higher risk of inflation. Nonetheless, in the current situation, it’s imperative for any government to think about the present needs than focus on future possibilities. Hence, to ascertain when the economy recover will depend on how fast are we able to control the spread of the virus, which we believe could take another 4-5 months to get it completely under control.
Talking about sectors, the current pandemic poses a great risk to our financial institutions. Even the FII favourite (HDFC twins), has taken a big beating in the markets and rightly so, due to its higher share of unsecured credit and retail presence. It is needless to say that other cyclical sectors like Auto, Metals, Infrastructure, Consumer Durables, Real Estate, Capital Goods would also be adversely affected. On the other hand, the defensives like Healthcare, FMCG and Telecom would also be affected but the intensity would be far much lower than the cyclical sectors.
And then we come to the most important question – What should investors do at this point in time?
We have all heard from the Warren Buffets of the world, that when there is fear in the markets, it’s time to be greedy. Well, it holds true as past evidence suggests but here we are with extreme fear in the markets. However, the greed is shaken and rightly so as the intensity of the fall (higher than any other crisis) has jolted the investors. The investors like you and me have far bigger worries now over the sustainability of our job or business. At this point, capital protection is the one thing investors look for, and equity is often disregarded due to its highly volatile nature. So what should investors do? We have always advocated that one must have at least 6-12 months of their salary or income in liquid assets. This protects you from any unforeseen circumstances like losing a job or slowdown/shutdown of business etc.
Coming to equity investments, new investors willing to invest can opt for SIP route in the current scenario. This will protect you from the ongoing volatility. Or if you wish to put lump sum, we would recommend to you to put no more than 20% of your decided amount. For existing investors, restructuring your entire portfolio is a must. Avoid holding stocks that have high leverage, management or corporate governance issues. We understand it is difficult to sell as it is 50-70% lower than your cost price. However, in a crisis situation there are only a few companies that make a comeback. In fact, some of the quality names are available at reasonable price correction. Therefore one should focus on investing in quality stocks. This is because they have a higher probability of surviving and can possibly recoup your losses.
We will soon come up with ‘Must Invest Stocks’ list. Do stay tuned. Don’t forget to share.
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