THE COVID-19 VIRUS
Humanity is encountering the Wuhan Corona Virus, something never been seen before in this generation. Countries are in lock down as the silent enemy is forcing behaviour changes impacting everyone of us.
We are hunkering down and retreating into our homes in an attempt to break the chain of virus transmission. After all, the virus spreads only if we allow it to.
IMPACT ON ECONOMY
This behaviour is causing a compression in demand and supply across the globe. The natural question among investors is if this is a harbinger of a deep recession.
One cannot predict how long the lock downs will last. However, one thing is certain: the Wuhan Virus will run its course. People will resume their jobs and supply chains will start humming again.
IMPACT ON MARKETS
The Wuhan virus crash has been the sharpest and fastest. We have seen Nifty go down to 7610 on 23rd March from a peak of 12000+. The has been accentuated by the intense sell off by Foreign Institutional Investors who sold $7 billion (or 0.35% of the market cap). In comparison domestic SIP and EPFO inflows are only 0.1% of the market cap and hence the sharp sell could not be ‘absorbed’ by the steady buys.
WILL THE MARKETS FALL FURTHER?
The worst case scenario of the virus has already been largely factored in. Stock prices are back where they were 4-5 years back. Oil prices are back where they are 15 years ago.
India’s market cap to GDP ratio before Wuhan Virus was at 70% whereas it was 150% in the pre Lehman cries. Now it is in the 40s which means the level is very attractive for an investor. So from a comparison standpoint, the markets are far more attractive today than in the GFC times.
Stock markets always discount the future. And it is largely factored in. I believe that this is possible but only if something very new further emerges. A huge death toll may also further spook sentiment.
WHEN WILL MARKETS RECOVER?
However, the whole of humanity for the first time is focused on solving one problem. That of finding a cure and vaccine for the Wuhan Virus. Governments are cutting red tape to enable faster clinical trials. Rapid test kits are being developed that can quickly spot a carrier and facilitate isolation.
As soon as the markets sense a scientific/technological progress, they will discount it also by moving up sharply. This will happen even if some more bad news is coming (e.g.: large death toll).
Markets often correct sharply, form a bottom over a few months, jump back and then take 1-2 years to recover to the pre-crash levels. We have seen this pattern in the 2008-2009 Global Financial Crisis crash.
Governments are trying hard to stimulate credit and revive working capital cycles. The US announced its $ 2 Trillion stimulus package on 23rd March. India’s Finance Minister announced several tweaks and relaxations in regulation.
The Reserve Bank of India has reduce interest rates, provided a 3 month moratorium on loan installments and instilled measures to ease working capital provisions. As a result one can expect credit growth to ease despite a gloomy demand scenario.
Based on how the markets responded to the 2008 stimulus packages (most countries followed suit after US), one can expect to see a revival once the worst phase of the virus is overcome.
WHAT SHOULD AN INVESTOR DO?
These are good times for a long term investor to buy more. It is impossible to predict the bottom. Those thinking that they should have exited at the top, would also be worried about investing when markets crash. Here are some guidelines:
1. This is not the right time to exit, unless one has extremely pressing cash flow issues.
2. One must stick to one’s asset allocation as per one’s situation and risk profile.
3. Make sure there is enough cash or liquid (and ideally some overnight funds in today’s scenario) to meet one’s medium term obligations (about 5 years, but this may vary).
4. Continue your SIPs in these volatile times.
5. With a very low ‘Market to GDP ratio, P/E level of Nifty as well has low Price to Book, one can assert that this is a good time to invest. Historically too we have seen that any global event causing a market meltdown has given lucrative investment opportunities.
For many investors who have seen a secular bull run for almost ten years, this would be a new experience. But those who have seen the 2008 crash, the dot com bubble and 9/11 know that markets always recover.