Wisdom in stock market says, ‘One who swims against the tidealways emerges as winner’. But looking at the current market volatility, where the stock markets across the globe have tanked in the range of 25-30 per cent and continues to remain volatile, no one has the courage to go against the wind.
The spread of the COVID-19 —coronavirus is a Black Swan event that continues to unravel across the world. The economic impact of the contagion is likely to be deeper than expected,even few weeks back, as severe travel restrictions are put in place and India is the fifth country in the world that has effected three weeks nation-wide lock down.
While short-term disruptions are likely to be severe, the market impact will depend on the medium to long term implications of the contagion. One big worry for the market is that an already slow global economy falls below stall speed and gets into a prolonged recession from these disruptions. Central bankers are reacting to these worries by aggressively cutting rates – although, these rate cuts are unlikely to have the desired impact in the short term as demand for products (especially discretionary spending) will remain weak till we see fears around this contagion subside. Finance Minister Nirmala Sitharaman announced a fiscal package of Rs 1.70 lakh crore on Thursday and RBI Governor Shaktikant Das unveiled monetary stimulus package of Rs 3.70 lakh crore including severe cut in Repo and Reverse Repo rates on Friday.
Global markets have been pricing in the impact of coronavirus, which has caused the sell-offs. Data shows that the health/life situation has worsened in key places like the US, UK, Germany, and India as well. The severity of this threat, its impact on all kinds of business, and the drastic measures that governments have suddenly had to put in (after weeks of playing it down) has exacerbated the situation
Back home, the bloodbath that has been witnessed is so severe that investors across the spectrum have suffered moderate to heavy losses. To give you an example, a south Mumbai-based investor and active trader Anish Sanghavi (name changed on request) who till now was just in money till February end, is on the verge of losing his capital invested since the year 2014.
Ever since Narendra Modi-led NDA government came to power, Sanghavi has never looked back as long as appreciation to his stock market portfolio was concerned. During the tenure of last six years, barring regular ups and downs, his portfolio always showed sizeable gains. However, in the last 15 trading sessions, thanks to hyper volatility that was witnessed at the bourses the tide has turned for him.
He puts entire blame on the government and the capital market regulator Securities and Exchange Board of India (Sebi) for not adopting pro-active approach in arresting the fall in markets. He cites the examples of Chinese and other South-east Asian jurisdictions, where governments have acted pro-actively and swiftly. All these markets banned ‘naked short sell’, anticipating the damage that COVID-19 contagion can have on the economic and financial sectors.
Sanghavi said, “The authorities have completely failed in understanding the impact of Machine selling (AlgorithmTrading), typically resorted to by Foreign Portfolio Investors (FPIs), can have on the bourses. This has proved to be the death nail for smaller investors like us.”
Actually, what he says is true to a certain extent and its impact was seen on the IPO listing of one of the most optimistic share sale issue of SBI Cards and Payment Services in 2020. The IPO that opened for subscriptions in early March (when the threat of COVID-19 was not so visible) was expected to fetch a hefty premium to its issue price. However, it actually got listed at a discount and closed the debut day (Monday March 16) with a loss of 9 per cent to its issue price of Rs 750. The situation has worsened for the newly listed stock thereafter. On Friday, it closed at Rs 655 a piece, Rs 95 below its issue price, 10th day after its listing.
This is not good news even for the government which has lined up ambitious disinvestment programme of Rs 2.10 lakh crore for the financial year 2020-21 (FY21). If the secondary market sentiment does not revive shortly (which is unlikely), it will directly have its impact on the primary market issuances and the government will not be able to steer through its divestment programme as anticipated. The possibility of the central government struggling to meet its two ends at the end of the FY21 cannot be ruled out.
The recent fall would have been more severe if the HRITHIK stocks had not gone up substantially in past two to three years. This is an unusual scenario in many years, where in all indices gave negative returns for three long years. Market cap to GDP ratio has come down to approximately 62 per cent, which is close to the levels we witnessed during 2008 global financial subprime crisis.
The irrational sentiment can override fundamentals in the short term. Whether the worst is over or not, will depend on effective tackling of COVID-19, in India and around the world.
Amar Ambani, Senior President & Institutional Research Head, YES Securities said, “What is certain is that the year 2020 is likely to be a volatile one, on account of US equity losing steam, poor global economic numbers, possible credit crunch overseas and our own challenges back home. As expected, monetary and fiscal stimulus has been announced, low price of crude and cheap valuation will favour investment."
Bhavesh Damania, Founder and Chief Care Taker – Wealthcare Investments, said, “Here onwards, all pockets of markets look attractive, especially the Mid cap and Small cap space. However investors must note that revival in Mid cap and Small cap space will take longer than Large cap peers. Once market finds bottom, companies with stable balance sheet and cash flows will be the leaders in rally. Private sector banks and strong NBFCs should also do well. At the moment the term “Cash is King” is quite relevant. Staggered entry into equity can be made instead of “Go all out”.
For India while the number of COVID-19 affected cases are still low, the precautionary steps and rub-off from global measures is likely to affect demand in a number of sectors such as airlines, tourism etc. Further it remains to be seen how the virus situation itself develops over the coming weeks.
The market is also worried about highly leveraged companies and weakly capitalised lenders. This issue has again come into limelight with the Yes Bank rescue. Steps from RBI and the government to restore confidence in the credit markets will be key to stabilizing sentiment.
On the debt side, pain has been of different nature. Defaults and downgrades have ruled the headline in debt space, over two years. COVID-19 is capable of giving huge economic jolt to the world. Central Banks globally will use monetary tools to revive growth and sentiments. Following a significant cut in interest rates by the US, RBI followed suit and cut the rates. Most of the rate cuts are front loaded therefore, investing in duration funds like dynamic bond fund, medium term bond fund and gilts funds can provide double digit returns to investors.
Damania said, “Since these funds are sophisticated funds, one must be careful with entry and exit timings. For retail investors, short-term funds or accrual funds are better options. One must review the portfolio before investing in any debt funds.”
This year will be all about survival of the fittest in the market. Markets may remain volatile in the short to medium term but businesses tends to be less volatile in the long run – even though they may face short-term hiccups for a quarter or two owing to the current challenges. Companies having strong balance sheets and strong leaders with effective strategy would sustain and thrive once the volatility subsides.
Jinesh Gopani, head of Equities, Axis Mutual Fund said, “We always believe that tough times provide the true test for all businesses and what differentiates the sustainable businesses is their ability to handle such times – and that’s exactly what we look for when investing our funds.”
Has the market found its bottom yet? What should investors do?
It’s difficult to predict how the market is going to move in times of such volatility. When there is panic in the market, decisions are made emotionally rather than rationally. The markets will always have a high level of dispersion between quality and unsustainable names. Avoiding mistakes of investing in traps has always been and should remain the key bedrock for investors to sustain and survive over the long term.
Vasanth Kamath, Co-Founder and CEO, Smallcase Technologies said, “An intraday swing from a fall of 10 per cent to a gain of 5 per cent for the benchmark index is unheard of, clearly highlighting that investors are still forming their views on the impact of this threat.”
Investors should avoid taking any knee-jerk reaction to the current sell-off. The ongoing downfall provides a great opportunity to buy – although with a 3 to 5 years’ horizon. Ambani too said, “From these levels, we’re sanguine on Indian equities from a 24-36 month perspective.”
Further investors should look at making steady investments spread over the next three to six months to avoid taking any undue timing risk. As the economy rebounds from these shocks over the medium term, the strong quality players will be in a perfect spot to take advantage of the opportunities that are presented.
Explains Viram Shah, Co – Founder and CEO, of California-headquartered and US Securities and Exchange Commission (SEC) Registered Investment Advisor (RIA) Vested Finance. He said, “Investors who have un-invested cash are in a great position. Companies with solid business models are available at significant discounts. Such investors should look to capitalize on this opportunity. Instead of trying to time the bottom, they should look to deploy funds and hold for the long-term. This is true for markets across the globe; it’s a great buying opportunity globally.” Vested Finance provides an online investment platform that enables Indian investors to invest in the US stock market.
Kamath too opined that in such volatile markets, it is best that investors stick to their plan, remain focused on the long-term picture, and stay away from panic markets. Such events are great reminders of the need for a diversified portfolio, and investors should start looking to build that in order to mitigate the impact of any such events in the future.
In order to identify quality stocks and insulate investors in such volatile situation, Shah said, “If you have already done your research right then your investing methodology should not change at all in such times. Believe in your analysis and continue to hold the companies that have a solid business model. Once the world does come back to normal functioning, these businesses will continue to endure. For someone who is a passive investor, the focus should be on diversifying one’s assets so that they can reduce total risk of their portfolio.”
Pankaj Pandey, Head Research, ICICI Direct said, “However, historically, it has been seen that market recovery in such casesis usually sharp and quick and precedes the economic growth rebound. Therefore, when the buying opportunity arises for the investors, it should be utilised to lap up good businesses which have comfortable leverage, strong return ratios and enjoy leadership position. The allocation, however, can either be made in staggered or in lump sum, depending on investor’s risk appetite.”
As Pankaj rightly said, the recovery in the markets will be swifter than the fall, which is a historical fact and to test that we don’t have to go far off in the past. Just 12 years ago, when the sub-prime crisis was unearthed following the fall of Lehman Brothers in September 2008, stock markets across the globe recovered in the next four months and from there onwards we saw a sustained bull run till recently.
The fall of 2008 was system driven, that is, the fault lied in the financial system of the global economy while the current volatility has been imposed upon the market from outside and this time, all the stake holders—market participants, regulators, policy makers and governments—all have adopted pro-active approach to contain the spread. It will be controlled sooner than later. One has to be cautioned for next two-three quarters till the normalcy returns. Till that time, keep an eye on all the developments, before investing.