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Market Meltdown, the Virus, and our Actionables

Guys,

Please maintain the sanctity of the main purpose of this thread.

There is a separate thread now for Scuttlebutt/Articles/Ability to Time on [Lockdown] and your opinion pieces (Lockdown - Extension - Market Timing Agility)
Please maintain the discipline to know where to post for lockdown related data points/articles/opinions

Lets get back to sectors/effect on sectors /2nd and 3rd order effects

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After a long time posting on VP as I feel after 3 years or so, we have reached a stage where active discussion on economy, business, market, liquidity & valuation can really make us collectively wiser. We are at a “never seen before… never experienced before” type historic juncture where not human greed and fear which drive economic or market boom and bust in all earlier cycles is playing the spoilsport, but a health hazard created the crisis after almost 100+ years when globe is much more interconnected, when people, information and analysis travel must faster than anytime in human history.

I would like to split my thought process in different silos and then try to connect those:

Supply Side issues: When the Covid 19 started in China, almost all took it as a Supply Side issue as China is global supply source of most key raw material and electronic goods in the world. Most expected a 3 - 6 months supply disruption and then things may come to normalcy. Now China is limping back to normalcy BUT the global major “Consumption Centers” of those supplies are unable to absorb those supplies. We can safely assume, right now, 60% to 80% of GDP of most countries are not functioning in Developed World and major Economies. The rest of the functions which are working are Essential Commodities, Banking, Power, Water, Medical Services etc which may constitute 20% to 40% of the economy, roughly. In this scenario, China is forced to cut back labor, factory working temporarily.

Similarly there would be local supply shock at local level and it may vary depending on how complex are the supply chain of different countries, geographies and localities. Like in India, labor dislocation from business centers and ‘productive activity areas’ can create supply shock in almost any labor intensive sector from Harvesting to Transportation. I expect supply shock can be felt much longer after the lock-down is lifted because — a) Presently we are getting supplies from past inventory; b) Govt machinery is working in emergency mode; c) Effect of farm or warehouse or logistic migrant labor shortage would be felt once new set of supplies are expected in the market. This can possibly create an effect in “Farm to Fork” supply chain and distort agri commodity price and price of non perishable effecting fall in income in hands of farmers. Also, if finance, demand or liquidity become a “choke point” then revival of Supply from MSME / SME sector may become longer than desired.

However, the Supply Side issues would be significantly less or zero in sectors which work in “Start & Stop mode” like Cinema Halls, Consumer Durable, Airlines, Travel & Aviation, Online Retail of non-Essentials, Availability of credit etc.

Demand Side issues: It is function of earning power, predictability of cash flows. demographic profile, availability of quality jobs, skill level, wealth effect and “animal spirit” ---- Now these issues have varied effect on different countries. In India, these issues are constraining our growth for many years as we faced quite a few economic shocks which are known to everyone like Demonetization, Lack of Private Capital expenditure, Stretched Fiscal Position (combined and real Fiscal Deficit is almost 8%+), Poor growth in Tax collection and almost zero job growth.
This Lock Down has only exacerbated the issue significantly ---- Now we face situation when many people who are employed in SME / MSME may find problem in retaining their existing job, there may be salary cut or deferment in well paying jobs, poor increase in salary / wage across sectors. Add to that, as discussed above, if farm to fork supply chain get affected then income in hands of farmers can be affected too. This in turn, may affect “demand side” problem in rural economy too. Also, migrant labor remitting money to rural home and augmenting consumption there – This will also get impacted which can further depress rural demand. Demand side problem is hard to solve in short term, in my limited understanding especially in India.

Why I think demand side problem is tougher to solve in short term: Our Banking, NBFC, MFI sector which fueled the demand in Industry, Business and Individual sectors respectively have passed through different phases of crises in past 6 - 7 years. In spite of high liquidity and low borrowing cost, banks would be cagey to extend liquidity to disbursing intermediaries like NBFC or MFI in uncertain situation especially when they just passed through the worst NPA crises from which it is just about to recover. Unfortunately this Covid 19 crises have come at a very critical moment for Indian economy as we were about to come out of the decade long Banking NPA crises and presently staring at another NPA crises due to this massive lock-down and slowdown. Also, the bond market in India is not that well developed to supply entire credit demand at right cost.
In this situation, Fiscal measures like direct cash transfer and very liberal credit is essential for a major section to survive (at least 40% - 50% of the population) … It would be surely done by Govt irrespective of tight fiscal but it would only help “Sustenance” but not a “Stimulus” to consume. To me. this distinction is critical and important when we model rural demand related investment thesis in FMCG sector.
The rest 30% to 40% of population would be cagey to spend because of obvious consequences of lack of clear visibility of cash flow / job security / salary growth especially in areas of large value discretionary items (Foreign Travel to High Value Consumer Durable depending on sub segment of the middle class).
Now this demand reduction leading to supply reduction is a negative feedback loop — Large Govt spending can break the vicious cycle. I am unsure how much ability Indian govt has to spend and inflate away the crises given fiscal profligacy can reduce our global credit rating to non-investment category and can create a different set of problem in attracting global fund especially in our bond market.

Businesses: It is much easier to identify.
Business has 5 sources of expense – Vendors (for RM, Utilities, Rental etc), Salary, Interest, Taxes & Dividends. Out of these dividends are last and discretionary. Taxes and Vendors are function of sales and profit, Salary and Interest are almost fixed in nature. If we take only debt free, cash rich companies then they may be better placed to survive longer duration than others unless demand of their end product is drastically less needed by market. But here also I can visualize a scenario where this assumption may not work ---- For example, take NTPC — which produce power but if industrial demand (which pays) is low for long time then consumer & agri demand (which is subsidized) would force Discoms to delay payment or resort to load shedding to save money. So, without demand from remunerative customers, very few businesses except FMCG & Select Private Banks can remain unaffected in their business economics (nothing to do with valuation).
Some businesses are avoidable for me in present context for short to medium term — Travel, Tourism, Airline, High Value Capital Goods, High Value Consumer Durable, Theme Parks, Construction, Commodities like Metal and Minerals, Real Estate, Corporate Lenders, NBFC etc. Please note, it doesn’t take into account valuation (Imagine valuation has no meaning for this part of discussion)

Market: Now unprecedented fall has created a situation where everything may be looking attractive if one has cash. And conversely, may look very unjust, wrong, disgusting to anyone who is already invested and wounded. Present market give no consideration to past history of the business, terminal value of the business, incremental improvements in business or quality of earnings. Panic & fear has its own justification and evolutionary logic and I personally don’t feel anything negative about being panicked (mistaking rope as snake 10 times may be socially shameful and humiliating but mistaking snake as rope just once is recipe for death and destruction) ---- Most global investors are selling today simply out of fiduciary responsibility of risk mitigation which if one likes can call “fear” but I am more charitable to their reasoning. Since 'No Body Knows Anything" about when and how fast better days would come, taking some money out by investors can’t really be called “fear”. It may be noted that FII sell this time is much lower (at least till now in % of their total investment) than 2008 and even lower than 2012 taper tantrums. Investors were in risk mitigation mode so either raising or preserving cash.

Liquidity: Presently the biggest problem is faced by companies globally is liquidity. On global level there is huge shortage of US$ as global trade is stalled, which is predominantly denominated in US$ and hence velocity of US$ reduced substantially. The massive fiscal stimulus announced by US of US$ 2 trillion may reduce the crisis gradually. But effect of this would be felt by emerging market currencies and depreciation of INR may be highly likely. In India, the liquidity problem is high for similar reasons of trade stalling, certain fixed cost continuing and stringent regulations & credit concerns making funding institutions very selective. RBI actions are more than expected but how much effect it would have is something solely depend on risk appetite of banking channels.
In stock market also the present fall is primarily due to liquidity issues faced by ETF and global funds due to redemption pressures and flight to safety of global capital. Whether this issue would continue, exacerbate or slow down is a matter of pure conjecture at present moment as we have no clarity of when the virus spread and related fear would subside. At present it is very tough to guess.

Valuation: I feel, even if two years of earning get impacted, the terminal values of robust businesses are not substantially impacted. But since the present selling is not due to market excess, the valuation based investment has no meaning unless one has very long term view as price in the interim may fall to any absurd level if concerted sell and short sell continue. It can have definite reversal only when virus related concerns are abated by concrete data or some cure or vaccine is discovered, all of these are not going to happen in very short term as we know today.

Positives: For India there are few positives. Firstly we are younger country and possibly due to our better immunity (left handed compliment to our poor social hygiene) we may withstand it better than many countries where median age is much higher and immunity is compromised due to high social hygiene standards. Secondly, 60% of our population is dependent directly or indirectly to agriculture, essential services and govt jobs, which would be relatively immune to the vagaries of economic cycle to some extent (not fully) & high resilience of Indian common mass due to its adaptation to living with uncertain environment like flood, drought, cyclone, vagaries of monsoon, localized epidemic and some such negatives throughout history. Thirdly, we have huge food grain reserve which can withstand extreme existential issues without much stress even if the problem become acute and lingers for almost an year.

Other points: Since unlike war or calamity this particular emergency like situation doesn’t need rebuilding of infrastructure but needs huge investment in public health, creation of more medical, nursing and healthcare facilities apart from giving income support to poor and vulnerable, we may also expect major change in focus of Govt expenditure and private sector CSR initiatives. Also, the lock down may change certain priorities of human behavior and consumption in medium term … I am yet to fully build a scenario about those changes as yet. One thing can be said though — Fear of high inflation may be misplaced in low demand environment even if Govt resorts to fiscal expansion.

Will discuss in a separate note about how where and when I feel stock investment may be initiated slowly.

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Impacts of this epidemic are massive and still we are just seeing initial views & first order effects, Just wanted to share my understanding:

Trump was recently forced to change tone from China-Virus to Thank you China, basically China control supply of all basic products, most likely china refused to supply Masks & PPE to US in order to force them tone down the narrative against china, most countries are in similar situation and dependent on China.

Supply Chains:
Basically in search for efficiency, resilience of countries/economies is compromised, so apparently localisation will be the theme going forward, as most countries will realise such vulnerabilities and will mandate local manufacturing as part of national security.

Since depression is deflationary in nature as massive jobs are lost --> lower total income–> lower total spending --> lower demand --> prices cuts

a perfect fit for such situation would be “local manufacturing” as it will help creating high paying jobs, its inflationary in nature and will help deleveraging, allow countries grow out of this likely depression, this could be permanent shift and would go on for years to come.

Portfolio Adjustment:
Avoid List: Exports, Travel, real estate, High value consumer discretionary, High debt businesses.
Buy List: India focused business, with low debt, for now essential products & services only:
ITC, IEX, Thyrocare, AIRTEL, CESC, Petronet LNG, Pharma basket coupled with some cheap bets like: CPSE ETF, Idea, KRBL
will add Index funds in case of another 20-30% cut from here in index.

rest planing to add some capital goods stocks as well, as India might get some share of global supply chain reshuffle, most likely lower end non critical products or pollution causing industries.

Timing part: I think panic in financial markets wont be lasting as long as historic panics/downturns lasting upto 1-2 years, as Social Media is amplifier of everything, thats why corrections are so sharp & sudden and quick, so i assume max damage will be discounted in next 2-3 months itself along with peaking of infection globally, would bet & prepare to deploy everything in next 2-3 months itself.

COVID19 India specific: i am hopeful India wont see social spread on large scale simply due to weather conditions, as in most cold country virus is most likely airborne, but in hot countries its not, i am saying this from my personal experience as i got infected with corona(Fully recovered now) while i was in turkey in first week of march, although i took all precautions, only time i use to take off mask was while eating, and most likely i got infected simply by breathing in infected air, but when i came back to Africa where temp is similar to India in 30-40 degree Celsius, before i knew i was infected i was with my friends and no one got it from me, also here in Africa, i see many cases where infected person went onto giving lecture in universities and then visited most of the hospital in the city but still there is no public spread, similar cases are in India, only specific sporadic concentrated cases are there, but no public spread on streets, although i understand its not proven scientifically simply because its not studied yet, as most countries are struggling to contain it.

This is Just my opinion, obviously can be dead wrong, rest individuals should assess according to their investment horizon, as economy will take time to recover, and depression may last minimum 2 years to max 4-5 years, any money needed before 5-6 years i guess should be kept safe in FD, i am working with 10 years investment assumption.

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I am a firm believer of anti-fragility, redundancy over efficiency/optimization, localism over globalization as captured below.

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Source: https://t.co/LbkfnWNjNJ?amp=1

Just In Time (JIT) supply chains which were optimized for efficiency will need to be re-organized to incorporate redundancies (Hence, China + 2 in the short term. Local supply chains in the long run)

If we consider Hospital from the above perspective it is possible that we may see policy change which mandates all hospitals to reserve and maintain dedicated isolation units to handle pandemics or secondary/tertiary waves of COVID itself (as is being predicted)

Now coming to the 2nd and higher order effects of COVID, I am sharing the below links which I came across the internet

@Donald: Below is a neat live document where folks are collaborating and capturing the 2nd order effects.

Another Google docs capturing the 2nd order effects:

COVID-19-s-Ripple-Effect-Mapping-Out-The-Societal-Economic-Consequences

Other links:

https://www.bloomberg.com/news/articles/2020-03-31/divorces-spike-in-china-after-coronavirus-quarantines

https://missionlocal.org/2020/03/for-victims-of-domestic-violence-sheltering-in-place-can-mean-more-abuse/

https://www.bloomberg.com/news/articles/2020-03-05/virus-makes-luxe-lobsters-so-cheap-that-sellers-face-fatal-blow

Must Read: https://unintendedconsequenc.es/coronavirus-consequences/
5 Part blog series

I believe most would have come across this paper from Taleb and his NECSI colleagues.
https://necsi.edu/systemic-risk-of-pandemic-via-novel-pathogens-coronavirus-a-note

Last but not the least came across the below site which tracks the consumer behaviour from multiple sources.

Apologies in case it is an information overload.

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13 posts were split to a new topic: Long Cycles 2.0: Learnings from Market Cycles-Secular Crashes- and Actionables?

4 posts were split to a new topic: Elliot Wave Difficulty/Identifying Waves

KPMG covid.pdf (1.9 MB)

Detailed sector wise impact analysis by KMPG.

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View Update:

Facts: The fall from Nifty 12430 to a low of 7511, happened due to the news of the virus. The fall was abruptly stopped (paused) and bottom was made on 24th March when US decalred the $2 Trillion package.

Current Asessment
On, 24th March, the registered cases for infection Internationally were around 4L, and 12 days later, they are now 12L.

I am noting for the past two days that close to 1L cases are being added every day! The number of everyday deaths is in thousands. This is alarming.

  • The virus is far from receding, in fact now the situation is getting out of hand. If the fall is due to the virus, then the cause is more intense now, hence so should be the reaction.

This theory gets more credibility when one sees that the fall was of 4919 points, whereas the bounce was 1528 points, a 31% retracement, which is weak.

Ordinarily, $2 Trillion package is sizable, but given the severity of the situation, if the package was a meaningful remedy then the retracement would’ve been 50% or 61.80% at least. Then there would be hope that a fresh bottom won’t be made.

Furthermore, the market on 24th March may not have factored in such a rate of increase in infection, and the second order effects like mass unemployment across the world (notable the US), widespread reaction against the Chinese and several conspiracy theories, which may result in international backlash against them.

Conclusion:
There is no room for bulls, yet. I would want to see the negativity, at least, partially fade into a neutral sentiment, before expecting bulls to start making value purchases. In fact, this week good stocks that come out with positive results, like HDFC Bank, will be sold into. Even the top-tier, Asian, Pidilite, FMCGs have started cracking.

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Below is my brief outline/analysis of a nice report published from KPMG on COVID-19 impact on various sectors and parameters.
*will update as I read more.

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Peter Navaro Director of Trade and Manufacturing Policy, The national Defense Production Act policy coordinator. He is a known China Hawk speaks on medicine, PPE, and other short supplies created by embargo imposed by fifty countries on exports of the same.

He is also a China Hawk.

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After this crisis, USA will be more on local production and less on import. This is negative news for Indian pharma as Modiji will keep drug price under control in India and USA will minimize import.

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This makes Piramal Eneterprises interesting. I have just read the annual report. Most of their manufacturing facility is in US and Europe. They are into Niche segment of Contract development and manufacturing high margin business. They supply generics to hospitals in US. In India also they have OTC drugs which do not come under much of price control.

The problem is the Financial business but here too - after reading the annual report - I feel they will survive with some damage.

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I may not be adding much value here but just to share my learnings:
1.During the last few years my major holdings have been mid and small caps.I always remained invested fully. Obviously PF has taken serious beating in the last few years. Things started changing only from September 2019.
2. I sold almost 70 to 80% across my holdings during the last week of February. Reason for selling was I could see the spread of corona to other countries from China and it’s difficult to control it compared to China as a source alone. Honestly I never thought the impact will be so severe and didn’t think much about second order effects of the same. I just wanted to preserve a bit of profit I made after two years.
3. While it was easy to sell, holding on to cash for the first time was very difficult. Fear of missing out was so high that I started looking at the market every hour, started tracking market indices across the globe and had sleepless nights (these things didn’t happen in the last two years even when portfolio was taking a lot of beating). It took a few days, interaction with a few seniors to calm down a bit.
4. I made a list of stocks which I have to buy and the price where I wanted to buy them. More than that I decided not to enter companies/sectors where I had no understanding like IT, insurance, metals… Etc.
5. Even though the share price of companies didn’t reach the price I wanted, I started buying them out of frustration, FOMO and I was happy that I’m able to buy them at a lesser price than what I sold and invested back 70% of cash within two weeks.
6. During the same time I could read a bit about global markets, central banks, importance of the US market and its impact on other markets, with covid cases in the USA catching up I realized that I made a mistake by reinvesting soon and ended up in selling (with loss) again to raise cash level.
7.Finally I seem to have found a balance in investing vs cash levels. When the market goes up I look at my PF and feel happy that my picks are doing well. When the market is negative I am happy that I have enough cash to deploy :wink:
8. During the one month what I noticed is I got rid of some stocks with a poor business model and I had difficulty in selling them for the last few years.
9.Focus was to buy companies which can sustain the current situation, expected to grow for next 3-5 years, manageable debt level, quality companies run by good promoters and good return ratios. As nobody knows when the market will make bottom I will continue to add overtime with present cash and monthly salary.
10. Key learning has been to have written down investment approach during such crisis, not to rush back for reinvestment, learn to hold cash, buying stocks which fit into the core portfolio and always seek help from seniors to improve investment approach.

Few more points :

  1. Some of us may think that hospitals revenue may not have a major impact. Contrary to it,hospitals business was one which got impacted earliest ,even before the lockdown or strict measures by Govt. Naturally people avoided coming to hospitals unless it’s an emergency due to fear of getting cross infected. Majority of elective cases got postponed. Unlike other industries, hospitals have to keep running without shutting down and most of the hospital occupancy has gone below 50% compared to 2 months back. With fixed cost persisting, operating leverage may work on the negative side for them.

  2. Pharma companies seem to be less impacted and the market is giving relatively better valuation as a defensive bet. Street may be expecting reasonable revenue to continue which may not happen. If hospitals business is not running optimally without many patients and elective surgeries consumption of medicines like analgesics, antibiotics, other medical consumables(eg :iv canula) will be reduced. Companies products focused on chronic therapies like diabetes, hypertension,…etc may sustain well. Results of pharma companies may not be rosy as expected.

  3. Few specific things:
    a. Vinati organics management expected good sales from ibuprofen due to covid infection as an analgesic in viral fever. But with initial data suggesting more damage in patients taking ibuprofen and advise medical bodies against use of ibuprofen revenue may get impacted.
    b. Sartans which are extensively used in the medical field.Companies like ipca, alembic pharma get good revenue from them. There have been reports of intake of sartans impact( both negative and positive) in covid patients.
    c. Some of the medicines like hydroxychloroquine, azithromycin and few antivirals have been tried in covid patients. Ipca lab, cadila , alembic seem like beneficiaries of the same in the short term. When the definite data comes out these may or may not be recommended to be used.
    (these specific things can be discussed further in respective company thread when we have more evidence)

Hope we find some effective drug and vaccine which can prevent covid infection.Finding effective vaccine may take more than a year. Going by one of the research reports as of now 2 vaccines have entered phase1 trials and 7 vaccines are in the pre-clinical stage.

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It is likely that economy may go back to its feet post September if everything goes normal.

Harvesting delays, shortage of raw material,labor etc ,social distancing rules, fear of losing job in private sector , impact on discretionary items-purchase,scare of mingling with crowd and its likely fall-outs on hotels ,airlines, travel - this is all going to play out in next 3-4 months .

Apart from that, There are about 10 million marriages/annum in India.Out of them,app. 3 million between March to July.

All likely to be postponed till September.

Huge impact on biz : vehicle,jewelry ,clothing,food,hotels etc .

All indications that economy would limp toward normalcy from May to September and it may get a huge upsurge on demand-side near Diwali.

A strategy needs to be thought about it -How to play this scenario ?

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2 posts were merged into an existing topic: VP Productivity 2.0: Mental Models Template - Emerging Moats

This article in a way summarises my view on the post-Corona world. My view may be a bit contrary to all the great pundits are talking about this being a hard reset to the way we operate our lives and businesses.

I think all that is crap.

We, as people, will continue to do exactly what we were doing. It is purely the recency bias that people are projecting things of today onto tomorrow. My take is with the exception of maybe online businesses pickup a bit and video conferencing/chats becoming more prevalent, nothing will change.

Lets take a look back at demonetisation. Everyone (and their uncle) were saying cash will be dead and most people will start transacting online or through mobile. And initial data did suggest that. Paytm became the poster boy. Pause and fast forward 2 years. Paytm is struggling to survive. Cash transactions are at an all time high and those businesses which were supposed to have been killed by the so-called “formal economy” are doing as well as they did before.

Will people stop travelling? No. Will people stop watching movies? No. Will people stop eating? No. Will people stop meeting friends and family or stop socialising? No.

Instead of reading motherhood statements from people claiming to know-it-all, think for yourself, what would you change after 2 years? My guess. Practically nothing. The time is important. The fear may be there for some time, but after a while, it just fades into memory.

In times like this, we tend to forget the most basic of human tendency, something which is the most important of all traits - survival. Businessmen and entrepreneurs are people who have always fought against odds and are very very adaptable. They will figure out a way out of any predicament.

As investors, our actionable is to watch out for those businesses which are shepherded by great management and have a tailwind in their business operations, high free cash flow and low debt. Mr Market is already helping you with the valuations and is likely to help you more in the future!!

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I see a lot of people trying to monitor the number of cases globally and in India and trying to figure out where the disease has peaked and where it is on the rise and so forth and so on. But corrections that happen due to one reason can continue due to other reasons, related to the first reason or unrelated to it.

And as Abhishek put up the details of market corrections with pullbacks, one has to think in similar terms. Markets dont go up or down in a single line. There will be the inevitable countertrend moves. We have had a sharp downmove till now with only significant rally from 7500 to 9000 and that too lasted only a few trading sessions and hence missed by most market participants.

If one looks at the history of major corrections, there are downmoves lasting 6-8 weeks and countertrend rallies lasting 2-4 weeks. This though is not etched in stone but one can keep a rough idea about these things. We took 8-9 weeks to go from above 12k to 7500 during March. Time wise we may be close to emergence of a rally lasting a few weeks and which could be tradeable. (Problem with such situations is one is not too sure where rally will begin and how long it will last and what we need to buy to get best returns for the buck.) During market meltdowns, easiest money is made shorting the markets but that is usually not something that comes naturally to most investors.

If we look at the timeline schedules in next couple of weeks, there will be q4 results season, probable lifting of lockdown, maybe peaking of viral infection and deaths in some geographies, some kind of possible positive news on a drug or combination of drugs being helpful. (I read a report citing benefits out of a drug ivermectin used in scabies in cases of corona though more data and research needs to be done.)

The first order thinking will tell us what are the businesses which are not going to be affected much by Corona. These are pure play telecom (read bharti), tv news companies (read tv today) pharma and fmcg in that order. These might be okay to play the inevitable bounce besides the beaten down better quality financials because financials as a class has been beaten out of shape and looks likely to have a dead cat bounce.

But one has to think about a scenario when all the dust has settled and viral fear has gone away and correction has ended. In such a scenario, companies will be available at no brainer valuations, ready to provide multifold returns on resumption of bull markets. These will be the very companies that are perceived to be the most affected by Corona. Markets are like a pendulum and never stop at equilibrium levels. When it swings towards pessimism, it tends to travel the whole distance and take stock prices to no brainer levels. Just to give an example, I used to track unichem labs. It has a lot of cash on balance sheet. I looked at it at around 180 levels when it had cash close to stock price per share. Since then it has done some capex and has had a couple of quarters of losses. So in effect cash per share is close to 140-150 as of now. But during the initial phase of market meltdown, it went down to 80-90 levels and quickly bounced back to 150 levels within only a few trading sessions. This was a scenario where we were getting the stock at minus 40-50 rupees based on cash per share and all the plants and business was there for free. For the prepared investors, markets will throw such full toss balls during corrections but we need to be ready with homework and have the gumption to pull the trigger when needed.

All said and done, human tendencies do not change too frequently and public memories are short. As abhishek mentioned in the previous post, post demo, people thought cash is going to go out of fashion but as we see now, it still circulates widely in the economy though not as freely and carelessly as before. Same is likely to be the case going ahead with businesses that are currently thought to be most impacted by the situation. e.g PVR is being pumelled currently as was expected. But 1-2 years down the line, people will start flocking to multiplexes and malls etc. I cannot see people not taking exotic vacations when all the dust settles. Same is the case with companies like avanti, At a price these will become no brainers but we need to be ready with our homework.

One has to have a clear mindset of what we are doing during investment. What our time horizon for our investments are. If we are playing for a bounce, we should be clear about it and if we are buying for next 3-5-10 years we should be clear about it. And the two should not be confused. For picking up long term winners, there seems to be plenty of time while for playing the bounce, one needs to be on the lookout for short term change in the market direction.

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Lots of interesting thoughts here on how this compares to other bear markets and what all sectors might be less affected and everything else related to changes being brought about by the event.

I thought I will put up my contribution here to help the commoners more than the people who are full-time investors or have significant knowledge of investing. This is the same thing that we have been telling to our advisory investors in private calls. This is to cut the clutter and bring out specific and easy actionable given the situation.

  1. Assess the impact on your employer and hence your salary/earnings prospects. The more worried you are about the same, the more savings in bank accounts you should be keeping and the more conservative your stance should be. This needs to be done for you and spouse if both are working.

  2. In any case, to avoid the tail risks (I am in no way saying that those tail risks will happen, in fact I am much more optimistic about the scenario than most others) keep 12 months of expenses in a stable big bank or a PSU bank (not liquid fund) and take adequate health insurance for your family. This is to avoid tail-end risk.

  3. Delay and avoid any major cash outflow for expenses or investments till the situation is clear. This would include assuming/increasing any loan.

  4. Putting 3 EMIs in the market is not a good idea. Better to just pay it as on schedule as an average investor is not even able to make 8-9% returns on his money at which home loans are due to mistakes or falling into the lure of so many other financial/real estate sale agents. Most other loans like personal loans, credit cards etc charge exorbitant interest rates and should anyways be paid regularly without taking the benefit of moratorium.

  5. Keep couple of lakhs or more of cash (as in hard cash) at home.

Now once we are done with securing ourselves for the next 12 months, lets come to financial markets - both equity and debt.

  1. Debt investments - this is an easy one, in good fixed income investments one is not getting paid anything for assuming the tail end risks, so avoid this completely this the situation gets cleared. This means no debt investments and even reducing the exposure in the same towards bank accounts. Considering taking some money into the bank. The idea here is capital preservation more than going for 2-3% higher returns

  2. Is this the time to increase/start taking in equity exposure - that depends on how much equity allocation you had in the first place - for most (most of clients are in the age bracket of 30-55 years and in stable jobs) who have upto 50% equity exposure (as % of overall networth excluding your primary residence) in general there is no case for further increase, for clients who have far lesser exposure - makes sense to increase but only in a very staggered manner. At the same time it is imperative to first hold 12 months of expenses in bank (not even in liquid funds) given that uncertainties involved. On equity first define your budget to buy. If it is 100 Rs of more buying power, then my sense is you should have deployed 20-25 Rs of the same by now utilizing the dips. Since, we were sitting on cash and some value stocks which prove to be quasi cash even in this scenario, this is what we are doing. Churning portfolio to make its expected future returns go up higher. Ofcourse, with a very staggered buying approach.

  3. Large caps or small caps - whenever the market bounce back happens generally larger stocks bounce earlier. However given this time, two unique things have happened - a) small caps were down 30% while the large caps were at all time highs and b) most selling is from FIIs not yet from DIIs or HNIs - hence uniquely in this bear market - both small-cap and large-cap indices have fallen similarly by around 33% from pre-coronavirus levels. I do not think returns would be very different once the situation improves. But for small caps in the much-affected sectors and/or with leverage - the situation would be worse than comparable large caps. So stocks to be avoided are small caps in sectors that will face the direct brunt and/or where balance sheets are leveraged a lot. For everything else, small caps with healthy balance sheets and in sectors that are not directly impacted, recovery will be the same if not better than the large caps. So the question to ask is what is the value one is getting relative to pre-coronavirus levels and on absolute basis. The other factor to consider is how new you are to the market. New investors should restrict themselves to large caps for now.

  4. How long it will continue and how worse it can get - Intituitevely and most likely it will turn out into another great buying opportunity in hindsight. However, tail risk is also present which needs to be mitigated with right asset allocation and staggered purchase as entailed earlier. Markets are great at discounting one to two year forward story so if the situation starts looking better, expect a good recovery which will most likely not be 100% to pre-coronavirus levels but still substansial. But it can get a lot worse also before it gets better, hence the asset allocation actionable as above should first be done.

  5. Books and like-minded investors. Investing especially value investing should not be done in isolation by most as taking contrarian stance is psychologically tough for most - consider being in the company of great minds first hand or at least in the form of books, vicariously. Consider reading some books - if not on investing then on history or psychology or talk to your trusted advisors and friends. Safeguard and improve your mental health to take the right decisions.

  6. Beta and not alpha - Don’t worry excessively about individual stocks if you are investing, much of the returns are going to come from being in the right asset allocation, right market caps and right sectors and right inflows rather than individual stocks. 2019 was all about stock selection. 2020 will be all about taking the right decisions on when to buy/sell stocks, how much to buy/sell stocks, which market caps and which sectors.

  7. Reduce your time to action - In adverse times, the time to decide and act should be much lower than what you do in normal times, protect your interests with alacrity.

Stay Safe. Prevent your health interests by over-reacting on social distancing, avoiding outside food, people, travel etc. This is India - unfortunately govt or society or even extended family can not help each other beyond a point. We should proactively safeguard our own interests.

Finally, I have written this from the point of view of a common investor. Safety comes first to them. As a long time investor, I am super-excited to be in this scenario, each crisis is the starting point of great wealth creation especially for those who are sitting on a lot of cash. And so will this be. But being a father, I think safeguarding our family’s interest comes before wealth creation and hence the writeup.

Regards,
Sarvesh Gupta

PS - I am a SEBI registered investment adviser. Views here are personal. Please consult you adviser before acting on any of the suggestions above.

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