I have written the following post in Market Meltdown, the Virus, and our Actionables - #67 by basumallick. I am adding it here for my own future reference of my own thoughts during the 2020 GCC (Great Corona Crash!!!).
This is a great thread started by @Donald. Let me put my two cents worth on this. Some of this I have already shared in the following posts:
- AA - Abhishek's Attic (place to store stuff to clear my head)! - #87 by basumallick
- AA - Abhishek's Attic (place to store stuff to clear my head)! - #90 by basumallick
Like in everything I am a strong proponent of understanding the context of a situation. For what we are going through, there is no precedent in history. Never in recorded history of mankind has entire countries and continents stopped working in one go. Let it sink in for some time. Never ever. Not in the 2 world wars nor in during the great plague or Spanish flu or during any other event did country after country shut down their business and basic way of living.
Pt 1 - There is no historical context.
We can compare with the last big fall which by the way was touted to be a once in a century event - the GFC or global financial crisis. A lot of things have changed since then. Interest rates, global liquidity, overbearance of central bankers on financial policy, newer geopolitical alignments are all different now.
To look at the current scenario, I think we are essentially faced with these questions:
- How bad can it get?
- How long can it last?
- What do we do if we are sitting on cash?
- What can we do if we are fully invested?
- What to buy?
Let’s take turns to think through each one.
1) How bad can it get?
I don’t know.
That is the simple answer. But I am personally expecting significant fall even from these levels. My reasoning is as follows:
US newsflow will continue to get worse over the next few weeks. US media, especially those which are popular globally are pro-Democratic and this being an election year, will fuel the frenzy further. India most likely will see increase in cases in the next 1-2 weeks which will fuel the fear of a longer duration lockdown.
The market shrugged off the RBI interventions. We need to see the market reaction next week to assess how the market is taking it, but when good news is swept under the carpet it is never a good sign.
I will be watching the 7500, 7000, 6500 levels on the Nifty closely in case we get to these levels.
On a fundamental basis,
Current Nifty EPS = 439 (standalone)
Possible FY21 Nifty EPS ~ 350-400 (expecting a 20-30% decline in earnings)
At a PE of 15 (standalone) we get a price range between 5250-6000.
At 6000 levels, markets would have corrected 50% from top. This is NOT impossible, even though it sounds improbable.
These levels are NOT sacrosanct. For all I know, markets could have already made a bottom last week.
2) How long can it last?
Again, I don’t know. But I am thinking on the following lines.
The way the economy is shaping up, the world is headed for a recession and India’s GDP is going to contract severely. Different estimates put it at a GDP growth of 2-3%, which is basically half of what was the base case scenario even 3 months back.
Today, sectors contributing to 25% of the GDP is working (telecom, banking, warehouses, pharma etc). 75% is sitting at home. Every month contributes 8.33% of the GDP. So, every month of a lockdown or restricted working impacts the GDP by 8.33%*75%=6.25%. Once the lockdown is released we will limp back to normalcy but the scars of this are unlikely to go away in a hurry.
I am personally preparing for a prolonged 2-year economic slump and consequent bear market or range-bound market. We could actually be oscillating between Nifty levels of 7000-10500 for the next 2 years. (I hope I am wrong!)
3) What do we do if we are sitting on cash?
Wait for markets to get some stability or valuations to become very lucrative. Good quality companies are still not mouth-wateringly cheap.
4) What can we do if we are fully invested?
The probability that markets go down from current levels is much higher than going up from here. So, I would sell ALL stocks which are non-core or where there is little or no fundamental conviction.
Raise some cash in the portfolio so that you can deploy at lower levels. This will also help you psychologically if the market falls further because i) you will know you have preserved some capital and ii) you will have some dry powder to deploy at lower levels.
This is NOT a buy on dips market. So, do not buy on dips 
5) What to buy?
Now, this is the most tricky question. Again this is what I have been agonising over the last 2 weeks. My thoughts are on the following lines.
If my base case of a prolonged bear market holds, then I need to look for companies which have:
i) strong free cash flows
ii) Zero or very low debt
iii) Real assets
iv) Moderate absolute growth
v) Good dividend yield
These are additional parameters to the normal ones of good management, high ROCE, reasonable valuations etc.
Pockets of opportunity would most likely be from the following:
i) Consumer discretionary
ii) FMCG
iii) Pharma (both domestic focused and export oriented) and ancillary (API)
iv) Agriculture and Food
v) Speciality Chemicals
vi) Utilities (electricity, gas)
vii) Strong banks & NBFCs
Longer-term opportunities need to be bottom-up.
Over the next 2-years, we need to be more cognizant of the overall market context than before should deploy a part of the portfolio in “value trades” rather than only long term buy and hold stories.
The beauty of the next 6 months would be the bleak short term outlook and the great longer-term opportunity. I would be on the lookout to find a balance between the two. It would be a great time to bring the word “multibaggers” back from the dead once again!!!