May 30, 2020
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Down, Down, Down! Why Coronavirus Will Lockdown Indian Stock Market Indefinitely

It is difficult to predict how the stock market will move. When there is panic, investors tend to make their decisions emotionally, rather than rationally. This is a Black Swan event, whose impact may be deeper and longer than what was estimated a few weeks ago

Down, Down, Down! Why Coronavirus Will Lockdown Indian Stock Market Indefinitely
Photo by AP
Down, Down, Down! Why Coronavirus Will Lockdown Indian Stock Market Indefinitely

A couple of listed stocks tell the story of the mayhem in the Indian stock market, currently in the grip of a global pandemic. Last October, the IPO of the state-owned monopoly, Indian Railway Catering and Tourism Corporation (IRCTC), listed at twice its offer price of Rs 320. By February-end 2020, it peaked to almost Rs 2,000. But by March 17, it tumbled nearly 50 per cent. Recently, investors expected SBI Cards and Payment Services to list at a premium to its offer price of Rs 750. It didn’t. On March 16, it closed its first day with a loss of 9 per cent.

This is true for most global stock markets. The average fall in each is within the 25-30 per cent range in the past few weeks. The same is the case with the Sensex, which fell from a peak of 42,000 points this January 17 to below 32,000 in three months. In the past two weeks, the New York Stock Exchange halted trading on several occasions. It witnessed the largest single-day fall during this period. A daily fall of 2,000-3,000 points in several global indices seems a routine affair. The regulators have no clue about what to do.

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This spooked investors like this South Mumbai-based active trader who doesn’t wish to be identified. In the past few years, his portfolio showed sizeable gains. But due to the current hyper volatility, over the past 15 trading sessions (until March 16), the tide has turned for him. He is on the verge of losing his initial capital. “The regulators failed to und­erstand the impact of mac­hine-based selling, a strategy adopted by foreign portfolio investors. This proved to be the death knell for smaller investors like me,” he explains.

When WHO declared COVID-19 a pandemic, the financial markets, as well as other asset categories such as real est­ate, commodities, crude oil, and bullion, it is the rare, completely unexpected, Black Swan event, whose imp­act may be deeper and longer than what was estimated a few weeks ago. As more Western nations, and others like India, declare economic shutdowns and travel restrictions, the worst may still be in the future. The short-term disruptions are likely to be severe.

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Conventional wisdom in stocks is that whosoever swims against the tide emerges the winner. Given the bloodletting in the markets, no one has the courage to do this. However, one shouldn’t forget that only the fittest survive during times of financial anarchy. The fact is that while the stocks can be volatile in the short and med­ium terms, the underlying businesses, especially those with strong balance sheets and potential, tend to be stable over the long term. The latter sustain and thrive eventually.

Explains Jinesh Gopani, head of equ­ities, Axis Mutual Fund, “We believe that tough times provide the true test for all businesses, and what differentiates sustainable businesses is their ability to handle such times.” A cautious Amar Ambani, senior president and institutional research head, YES Securities, concurs that “2020 is likely to be volatile. But we believe monetary and fiscal stimulus will come through soon, and low price of crude and cheap valuations of stocks will fav­our investment”.

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Still it is difficult to predict how the stock market will move. When there is panic, investors tend to make their decisions emotionally, rather than rationally. In the universe of stocks, there is a high level of dispersion between quality and unsustainable names. Avoiding mistakes of investing in traps has been, and should remain, the bedrock for investors to sustain and survive in the long term. This is easier said than done. Fear and uncertainty remain.

“An intraday swing, from a fall of 10 per cent to a gain of 5 per cent, highlights that investors still haven’t formed a view on the impact of the current threat,” says Vasanth Kamath, co-founder and CEO, Smallcase Technologies. But this is also the time when investors need to avoid knee-jerk reactions. The current downfall provides a great opportunity to buy, but only with a 3-5 years horizon. As Ambani predicts, “From these (low) levels, we’re sanguine on Indian equities from a 24-36 month perspective.” This implies that he is confident the good stocks will gain in value in three years.

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Hence, the brave investors can look at investing steadily, but carefully, over the next three to six months. They can take cool and calculated investment risks, but avoid timing risks at all costs. This implies that no buyer, howsoever sharp and smart she may be, can exp­ect to buy stocks at the lowest levels. One needs to buy, and hold, even if the stock goes down further. And then wait for a few months to a few years for it to rebound. The strong quality players can then be in a perfect spot to take adv­antage of the future opportunities.

Explains Viram Shah, co-founder and CEO of the California-based Vested Finance, “Investors who have un-inv­ested cash are in a great position. Companies with solid business models are available at discounts. Investors should capitalise on this opportunity. Instead of trying to time the bottom, they should deploy funds and hold for the long-term.” Kamath agrees that in such a scenario, it’s best for investors to stick to their plans, remain focused, and stay away from the panicking markets.

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Great Swan Events like the current one are reminders of the need to have a diversified portfolio. Hence, buyers should seek to have a basket of assets that can mitigate the impact of such events in the future. The way to identify quality stocks and insulate oneself, Shah advises, “If you have done your res­earch right, your investing methodology should not change. Believe in your analysis and continue to hold the companies that seem strong. Once the world comes back to normal, these businesses will continue to endure.”

Another fact that investors need to remember is that although the stock indices fall sharply during such crises, they tend to go up faster during the turnaround. Pankaj Pandey, head of research, ICICI Direct, explains, “Historically, market recovery is usually sharp and quick, and precedes the economic growth rebound. Therefore, when the buying oppor­tunity arises, it should be utilised to lap up businesses that have comfor­table leverage, strong return ratios and enjoy leadership position.”

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Consider, for instance, the financial crisis of 2008. The sub-prime scandal, and the fall of global financial giants like Lehman Brothers in September 2008, led to global madness in the fin­ancial markets (including stocks), real estate, commodities, and other assets. The economies of several nations, including the US, seemed decimated. Experts talked about the coming of the Second Great Depression. During the first in the 1930s, stock markets and nat­ional economies did not recover for a decade.

However, after September 2008, in an unexpected fashion, stock markets across the globe recovered over the next four months. Since then, most markets, including the Indian one, saw a frenzied, unstoppable, and sustained bull runs, despite few hiccups. The coronavirus disrupted it, and led to massive confusion and chaos among the investors. So, the same turnaround may happen this time. And investors need to be prepared for it.

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There is a difference, though. The 2008 crisis was system-driven, i.e. it was caused by the faults within. The regulators, central banks, and policy- makers had to react with speed to correct it. While it took months for the stocks to recover, nations took years to fix their economies. In 2020, the crisis is an external one. After a slow start, the stakeholders have come together to pro-actively contain the spread of the virus. Like 12 years ago, the market may turn northwards within 1-3 quarters. The economies may take more time.


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By Yagnesh Kansara in Mumbai

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