Lockdown - Extension - Market Timing Agility

Major events that have played out in the meanwhile -

Stability in the Oil cartel returns though oil prices will continue to swing for a while. The prospect of a supply war at a time when demand is expected to collapse was a huge risk to the US bond & banking markets. Oil at very low levels for even 2-3 months could have been disastrous sending a bunch of companies in the US into serious solvency problems. Liquidity issues can be solved by central banks, solvency problems will call for bailouts which aren’t so easy to execute. Overall impact is positive for sentiment across markets

Increasing focus on whether the lock down is achieving the intended effect or not across countries. Going into lock down for a month is an easy decision for any Govt (they can always say “we tried” and give the perception of prudence), extending this into a 3-4 month lock down however is very difficult. Indian Govt came out today and said extension by another 20 days which was anyway expected, interesting thing was the reading between the lines that said they might consider opening up clusters that are behaving well/less affected well before the May 3 deadline.

Extending this thinking deeper - Govt does not want to be in a situation where the lock down is opened but supply chains continue to remain broken. The next 2 weeks will see a lot of action in the background where the Govt is tying in things using the FMCG distribution channel at a state level. Read more here - https://economictimes.indiatimes.com/industry/services/retail/government-to-set-up-20-lakh-suraksha-retail-shops-to-meet-to-provide-daily-essentials/articleshow/75106516.cms From my discussions with some FMCG folks over the past 3-4 days, inventory levels needs to be replenished which will anyway call for focused action. The Govt will likely have the revival mechanism working before the lock down is lifted to avoid chaos.

My overall takeaway continues to be that the lock down will end sooner than later, especially in India. A 3 month lock down can and will most likely be disastrous for India - won’t be surprised to see reports projecting zero to slightly negative GDP growth for FY21 after this 20 day extension. The economic prospects for a longer lock down will start looking really ugly. We just do not have the means to keep pumping in money as stimulus or for the central bank to go into QE mode like the developed nations.

Here on we will have some companies that start announcing Q4 results, on the conf calls all questions will be about Q1 rather than what happened in Q4. We will soon have some sense of the economic impact across industries and companies, all these days we were just shooting in the dark. The market is unlikely to get too worried about a Q1 washout, a Q2 washout is a different ball game altogether and can make the stock market outlook much worse that it is right now.

Markets across the world have also started reacting to liquidity measures and central bank announcements. We may have well seen the worst of the Wave 1 of the pandemic in terms of the impact on financial markets. VIX has cooled off more than 40% across equity markets, there are no jerky FX movements or wildly swinging bond yield movements too. How markets react to central bank action is a huge input to my framework, things are much more normal today than they were around March mid. Just see the gold chart in USD terms since the beginning of March till today.

Between 2010 and 2013, developed country markets were in a strange phase where bad economic news was being cheered (which meant QE and central bank support continues rather than be withdrawn). I would not be very surprised if the markets go into that mode here on, so we might see economic news that looks bad in a conventional sense but the markets just shrug it off knowing the central bank has it’s back.

The big risks to the current market situation are a combination of wave 2 of the pandemic in the countries first hit by the virus and extended lock downs as a result.

The market agility factor will come in handy where once these big risks are addressed/covered, one can actually go and increase the equity allocation % itself, rather than just continuing to buy the stocks that have already been identified. I would spend more time listening to asset allocators rather than to fellow stock pickers over the next few weeks/months.

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Well i agree and do hope that we may not require another lockdown after 3 may.

But a lot depends on the rules which the government will define for easing restrictions in a particular cluster. Its always desirable to kick start the economy to solve the problem of job losses , food and other supply shortages. In the speach the PM for the first time acknowledged that ‘Jaan hain to Jahaan hain’ . Clearly now the ones would be to clear infections from a cluster fully before lifting lockdown together with making sure the essential suppliers reaches all. We can worry about economy only after we have solved this puzzle of corona to the root. Economy will kick start only after those who belong to working class can go to their jobs without worrying about acquiring disease. As of now 60/70 % of infections and large part of deaths are reported from working age group only. So they know they are not immune.

The economy hubs of the country (Delhi and Mumbai) have not at all peaked. Infact a new wave of infection is about to get start from the hospitals itself. Large number of corporate hospitals are reporting infections among doctors and patients. Almost 10% of tests conducted in delhi are positive, so may well have reached stage of community transmission in delhi. So i don’t see easing of restrictions in these economic hubs even at the end of 3 weeks.
I hope and prey to god that i am proven wrong.

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The trend of Number of Infections in the World with each passing day… It is still clearly upwards

Figure has reached 20L

This is the rate of Infections per day, peaking around around 1L

Past pandemic of 1968 had death toll of 10L people the world over. Another in 1956, the Asian Flu took 20L and lasted 2 years, and wiped 15% population of Hong Kong.

These things are serious. The one we are currently in, has a death toll of around 1.25L a comforting figure in comparison, and it’s been around since January, around four months in.

Going from history, in the best case scenario, this could last another 2 quarters and take a lot more lives, considering earth is more populated since.

Things are far from being normal. It feels the markets will test the Nifty bottom of 7511.

This event will cause havoc in varous industries, affecting Banking sector the most, which has most weightage in Nifty.

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As a person who has a substantial amount of networth in equity market, I wish and hope it were true. But facts point to me otherwise.

  1. Virus come in waves. What we are seeing now is the first wave. It will subside and the second wave will start and so forth and this will keep going on till the herd immunity is reached either due to substantial number people (60%-70%) get infected and develop immunity or through mass immunization through a successful vaccine. There is no other way. In this way, it is different from other natural or man made disasters like a massive tsunami / earthquake or a nuclear blast which are basically one time events in a smaller timeframe.

  2. If the economy were to run at full speed, it needs an abundance of cheap labour. First phase of migration from cities has already happened before the lockdown and second phase will begin almost immediately when the communication network starts after the lockdown. Another problem is that with the reverse migration, the virus will spread to the interior of the country where there is a lack of testing and isolation facility, complicating the healthcare situation manifold. And these workers will not be in a hurry to go the economic hubs again to join workforce.

  3. It’s highly probable that what we are seeing at Delhi, Mumbai, Indore etc is that the community transmission has already started. If that’s the case, these economic hubs will be in lockdown even after the rest of the country opens on May 4th. When these economic hubs start sputtering, rest of India cannot carry on as usual.

  4. What will happen to consumer psyche once this crisis is over? Will they go out and start buying boosting the economy in the process or will they continue to hoard for many years even after the crisis is over like what happened in US after 1929? Indian household debt has gone up from below 9% to above 12% of GDP in the last few years and it is one of the few engines that has kept the economic engine running. What if consumers decide to take a pause and boost their savings?

The markets are buoyant after the last month fall and may be the wisdom of the crowd is really superior to any individual analysis. But what if it is not?

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Why do I love threads like this? Once we put things out there in black and white, we can come back after some quarters are see if the thought process was on the right track or not.

I don’t think we are close to being done with the COVID-19 induced market shift but with 6+ months having gone by since the full brunt of the market mayhem hit us, we can look back and do some honest evaluation.

I didn’t really manage to be agile enough in buying once it became clear that India could not afford an extended lockdown, but the reason for not doing so was that I was close to the target equity allocation mark as the market started to recover. I did not go into the crisis COVID-19 with a lot of cash, though I had sufficient cash/fixed income allocation. That said, I was lucky in the sense I was already positioned in segments that took off post COVID-19 and had minimal exposure to those most affected by it (zero exposure to lenders, no exposure to consumer discretionary, most businesses low on debt). From July onward it was almost as if the March crash never occurred. This was largely an outcome of the investment process I had in place, not because I was able to anticipate what could happen post the March crash. Though I did do some selling to tweak the sectoral allocation, it wasn’t a knee jerk reaction and had logic to it.

The widely acknowledged high quality businesses aren’t the ones that made the biggest money for investors, it was a relatively new set of names that turned in the biggest gains. As a cycle turns, the leadership shifts. This has been proven to a good extent again, time tested principles have held up this time too.

As of today we are seeing a second wave across many developed nations but people seem to have accepted the situation as something that they need to cope with. The spread of the virus is much higher today than it was during March but the fear of the virus is less than half of what it was. Human nature and resilience does not change all that easily.

The actionable for me continues to be that I need to be better calibrated in this cycle than I have ever been before. The playbook that worked very well over the past 12-18 months might not work as well going forward, given that most of these businesses are fully priced now. Even if one is just slightly ahead in the game, the ability to take proactive decisions goes up significantly. This has been the biggest learning for me.

Another learning has been that a better quality portfolio enhances your ability to take chances during market downturns. If one is worried about the existing portfolio quality, how can one focus on possible rewards without the fear of losing more money overwhelm the senses?

Always ensure the portfolio is balanced enough to weather a steep fall in the market level. This is what enhances your agility as an investor. IQ, knowledge and conviction can help but not by much when you see a 25% fall within a month.

My take continues to be that India cannot afford further lockdowns, the economy is already in enough trouble as is. The MSME distress does not augur well for the job market over the next couple of years, this is by far the worst employment situation I have observed since 2001. It is time to worry more about these aspects than about the virus from here. I continue to ponder if the Govt has enough arsenal to be able to do some fiscal spending without impacting the balance sheet and credit worthiness too much.

Disclosure: No comments on specific stocks or sectors here, just posting about my current thought process and also evaluating if my reaction to COVID-19 crash was on the right lines or not. I am a SEBI registered Adviser and my actions in the investment portfolio I manage are in line with the thoughts posted above

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