There is great opportunity in the Corona crisis

by April 18, 2020 0 comments

Instead of waiting for the stock market to hit the bottom, experts recommend taking a gradual and incremental approach where you start investing a small portion of your cash on a regular basis and take advantage of the current crisis

Any crisis brings with it great investment opportunities but it is not easy to decipher what to bet on. At present the sentiment in stock markets across the world is gloomy and financial markets in India, too, are witnessing sharp volatility as a result of this. The fall is in line with the global benchmark indices as the domestic market usually tracks them. The stock market is likely to continue to be highly volatile in the near future. Further, with Foreign Portfolio Investment (FPI) flying to the safety of dollar-backed assets, this has led to a sharp plunge in the Indian stock market. The S&P BSE Sensex, which was 42,273 points on January 20, dipped to 29,894 points on April 8. The Price to Earning Ratio of the Sensex is less than 18, which is far less than its historical range of 20-24. Markets across large, mid and small caps have corrected sharply from their peaks. In the Financial Year (FY) 2019-20, the mid-cap index fell by 26 per cent while the Sensex fell by 22 per cent. But that does not mean that it is the end of the stock market. Volatility tests the patience of investors and traders. While the trader ends up losing money the investor grabs multi-baggers.

COVID-19 is a black swan event: Throughout history, there have been highly improbable events that catch almost everyone by surprise and can potentially have a large impact on status quo by disrupting human activities and/or creating havoc. These are called “black swan” events. The name stems from the fact that up until 1697, mankind believed that all swans were white. Then Dutch explorers sighted black swans for the first time in Western Australia, completely nullifying the belief that swans can only be white. Thus, the term “black swan” is used to describe an improbable event which also has an extreme impact.

The field of finance regularly  attempts to capture outlier events and fails with equal regularity. The impact of the Coronavirus on the stock market has all the characteristics of a “black swan” event.

Crash and recovery: Worldwide stock markets have a history of crash and recovery and the Indian bourses are no different. The Sensex plunged 53 per cent in one year during the “Harshad Mehta scam” in 1992 but recovered 127 per cent in 17 months.  During the “tech bubble burst” in 2000, the Sensex crashed 56 per cent in 17 months but recovered 138 per cent in two-and-a-half years. When the US faced the “Lehman crisis” in 2008, the Sensex crashed 61 per cent in a year but recovered 157 per cent in 17 months. The current market has crashed around 30 per cent in less than three months. Due to the Covid-19, no one knows when the economy will come back on track. Some experts even compare this meltdown of global economies to the “Great Depression” that started in 1929 and lasted until the late 1930s. Between 1929 and 1932, the worldwide Gross Domestic Product (GDP) fell by an estimated 15 per cent. By comparison, the global GDP fell by less than one per cent from 2008 to 2009 during the “Great recession.” Given the economic slowdown in India, the Yes Bank imbroglio, the CAA-NRC protests, Delhi riots, panic amid the Coronavirus, the sentiment is extremely negative. And this led to the March-April meltdown on the Indian bourses.

Fear and greed: Investing in the stock market is not all about technical and fundamental analysis but also about analysing the behaviour of investors at large. Investors discuss and agree to take rational decisions but at  times they are influenced by events and behave irrationally. Sometimes their actions are influenced more by emotions rather than the fundamentals of the stock market.  Historically it has been proven that in a bullish market, investor decisions are based on potential gains rather than losses and they make risky investments. However, stock markets reward patient long-term investors. There is no better way of making money other than owning a great bunch of Indian companies and ignoring the inevitable ups and downs of the market.

The future of other sectors: The banking sector may see more pain but the insurance sector may see gains.

The automobile sector, which was suffering due to the 2019 economic meltdown, may benefit from the Coronavirus outbreak. Recently, Maruti Suzuki India said that they expect to see a boom once the lockdown is lifted and as social distancing becomes a common practice, forcing people to buy more cars. Similar views were shared by other automobile makers. The Nifty 50 Index — a diversified 50 stock index accounting for more than 13 sectors of the economy — has rallied by over 20 per cent since its March lows.

The Nifty Pharma Index, on the other hand, has skyrocketed to over 37 per cent, outperforming the broader markets quite remarkably. This happened because with the world grappling with the Coronavirus pandemic, the spotlight is clearly on healthcare. In the same way, the agriculture sector might not be affected much.

However, despite numerous attempts by the Reserve Bank of India to stem the freefall in the Indian currency against the US dollar, there is no end to the pain. This may benefit the software export sector and TCS, Wipro, Infosys and so on could be the beneficiaries. But real estate, hospitality and the entertainment sector might be the real losers in the stock market. The oil and natural gas sector might also suffer but as crude oil prices are low, their losses are under control for now. Due to the lockdown, inflation has reduced but so have the volumes. Various sectors have felt the positive impact of the pandemic whereas others have borne its negative impact. Thus, their share prices will move accordingly.

What of recovery? It would be foolish to expect a quick economic rebound from the current crisis. But considering the all-out efforts by Central banks and fiscal authorities to soften the blow, a deep economic slump might be avoided. The problem in the current scenario is that until we know how quickly and thoroughly the public-health challenge will be met, it is virtually impossible for economists to predict the endgame.

Global trade is expected to fall across all sectors this year but could rebound later depending on when the pandemic is brought under control and the policy choices governments took to support their economies. Once business and economic normalcy returns, the stock market will start moving in a positive direction. Recovery would be faster than expected. But if people only do discretionary spending then economic revival would take longer.

Whether it is correction or growth, both phases are worth taking an exposure in the stock market. But don’t try to catch the falling knife.

What should investors do? Most of us would want to wait till there is some clarity or evidence on how the Coronavirus will be contained, before deciding to invest. But practically waiting for the bottom to invest is extremely difficult. Therefore, instead of waiting for the market to hit the bottom, experts recommend taking a gradual and incremental approach where you start investing a small portion of your cash on a regular basis. If there are sharp further corrections, the amount deployed can be increased aggressively. The current crisis can be a great opportunity for stock market investors.

(Writer: Abhishek Raja; Courtesy: The Pioneer)

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