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 
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 :
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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.
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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.
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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.
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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.
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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.
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Delay and avoid any major cash outflow for expenses or investments till the situation is clear. This would include assuming/increasing any loan.
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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.
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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.
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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
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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.
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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.
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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.
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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.
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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.
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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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It’s great to applaud a great value-additive post from Members. But please be conscious of your value-addition in anything that you post in this important thread, or how you take a members post/discussion forward.
Unless that element is there, please applaud him in a direct PM. Share there that you have bookmarked and whatever other comments you may have.
Have deleted some posts. We will be very strict with ensuring value-add in posts from Members here. I urge others to be equally vigilant and flag one-liners. clear non value-additive posts. At the same time be tolerant and open to all kinds of inputs - but something that takes the discussion forward. Any endorsement/Agree with your view types - of earlier well-established well-articulated views to be flagged asap - if it is merely a repeat (even if laudatory and/or with fresh opinions, but unsubstantiated ) - without any fresh angles/take-forward.
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In this video, US is talking about how in the time of crisis we come to know how much we are dependent on life saving drugs and other items from different parts of the world. No matter how many treaties we have at the time like this there is restrictions on exports from many allies. Once this crisis gets over, we would have local manufacturing these items to reduce dependence on other countries.
This is the paradigm shift which many countries would do to produce many products locally like pharma, medical equipment, masks etc. Similarly, dependence on China for many products might also get diversified.
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These are easy things to say. But manufacturing in US is damn expensive. That is the reason why the manufacturing base shifted to China and other countries. Bringing it back to US will not happen simply because it is not economically viable. These are political talks given to play to the gallery. What is more likely to happen is there will be more involved trade negotiations with binding agreements to supply under all circumstances etc.
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But there is a good chance that prolonged unemployment can shift along with the realisation that globablisation has lot of side effects which are being felt now.
and seriously US will think about scenario that they go to war with china and they are not able to get there paracetimol because china put an export ban.
its difficult to fathom that US/european countries and corporations facing once in a century crisis will be rushing to upend and transform their way of business and supply chains once this global lockdown ends . The focus would be to get the economy and people’s lives to normalcy as soon as possible and best way to do that would be resume business as usual . There could be some token headline making steps to satisfy the proletariat but unlikely leading to decline or end of globalization.
There was lot of talk of Financial industry reform after the 2008 great recession but nothing much changed even in the face of aggressive populist moments like occupy wall street and anger towards the one percenters.
Dark money by Jane mayer is a good read to understand the power of american oligarchy and how they successfully managed to counter threats to their interests post obama election .
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Latest memo from Howard Marks
Germany is a manufacturing behemoths. It manufacturers things like (Speciality) Chemicals, machinery, automotive.
There is no reason US can’t do the same even with it’s higher labour costs (compared to China). Compared to Germany, the US has:
- Lower land costs
- Lower taxes
- Vastly lower energy costs
- A big internal market to give any manufacturer economies of scale not dependent on foreign markets.
There has been a flight of manufacturing from US cause of various interests (read: rich industrialists and executives) of corporations saw that a cheaper offshore manufacturing removes lots of regulatory hassles and yet increases sales, thereby making profit even with lower margins.
The result has been rampant drug problem and flight of young people from middle merica. Various people haven’t been able to turn that policy around cause US is a biparty system and the current system was supported by both party, but a big external shock like Covid could change the system, especially concerning manufacturing of critical products needed in a crisis.
And it can be a virtuous cycle for middle merica, pushing more people on that route.
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I don’t think there will be significant paradigm shift in globalization. When we say life saving drugs - how to define it ? Today its corona virus. What about about some unknown new virus is found tomorrow for which hydrochloroquinine doesn’t work. Also US has invested billions of dollars outside the US for various reasons - market growth oppurtunity, cheap labour, resources etc - bottom line is maximum returns for the buck invested.
Germany makes high end, high tech and low labour intensive products in general. Comparing it with China or US is not right.
I am not saying that US can’t or won’t do something to fix the current situation. My point is it’s too premature to think about it. And whatever we say will be conjecture. Let’s wait for the situation to play out. We will get enough time to see how things are changing on the ground. Factories can’t be built in a day.
My point is simply this. We are spending way too much time on macro. I personally like to study macro but it’s for understanding the context. Deriving investment insights from macro is very tough. And I have learnt to be very careful of macro forecasting, simply because there are way too many variables (most of which I don’t know and correlations between some I don’t understand).
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The regulation & laws will still be around. They cannot change 100s of regulations and laws overnight, which are enshrined in the constitution. So effectively the rich capitalists will continue to resort to bypassing of the regulations by opening offshore dev centres & data centres (software giants do this to save taxes & other regulatory hurdles). In facts these measures to regain profit by corporates is what fuels the stock market in the US. So its not going to be easy to bring back manufacturing in the US unless they ease the regulations, taxes & laws. Even if they change the regulations the environmentlists won’t let that happen. They have very cunningly managed to export all their pollution to China & India & profit out of it. I guess they won’t accept manufacturing of low end technology items like chemical, rubber, plastic, glass etc
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