Good morning everybody, we hope you and your family are safe, taking care and staying at home.
This period has been a period of introspection and rethinking for most people.
We have been receiving a lot of queries from a lot of investors regarding “What is the current market scenario,where are we investing today”. Most people want to know what we are doing, so as to get an understanding of the stock market in these trying times.
We are all flooded with information, some factual , some predictions, some opinion and some extrapolation from analogies to similar epidemics or crisis in the past. Today most people are just guessing and giving it fancy names such as analysis, assessment, projections, forecast, etc.
As Howard Marks recently said in a memo to his clients, “Everyone has the same data regarding the present and the same ignorance regarding the future.”
Some people think they know but they may not. But suddenly mortality seems to have come closer and risk has taken a new meaning.
The harsh reality today is that there's no commonality between what happened in 1989, 1993, 2001 and 2008. Each was a different story. You can calculate the averages, but averages are a poor tool for such unprecedented times.
However, what we know for sure is:
A) We are in the midst of one of the greatest pandemics to hit the world since the Spanish flu of 1918.
B) The world is not coming to an end.
C) The new normal may be quite different from what we are used to. Just to illustrate, TCS in its guidance given along with 2019-20 results has targeted that, only 25% of its employees will work from office by 2025
D)Most experts are reaching conclusions suitable for them and supporting their hypothesis and most people are interpreting data/info supporting their confirmation bias.
E)The world may be facing one of the greatest economic depression since the great depression of 1929, with GDP’s contracting and the possibility of only India and China having a mildly positive growth rate in the current year.
F) The greatest oil price decline in the OPEC era.
G) The greatest central bank/ Govt intervention and stimulus to world GDP of all times with even the world bank willing to commit its complete war chest of $1trillion and the US and Europe, committing more than 10% of their GDP in fiscal stimulus to meet the economic problems head-on.
One of the biggest moral dilemmas faced by the world today is the trade off between minimizing deaths versus restarting the economy.
With this background lets comeback to the main topic of ‘Where are we investing’ in the Covid 19 Period.
The first thing that we need to understand is that the stock markets and the economy don’t necessarily have a linear relationship. The markets move ahead of the economy and are based on the earnings or the potential from future developments. Essentially markets are driven by or have the following four legs:
a) Earnings and Valuations: The outlook for earnings look rather bleak in the current qtr and most parts of the next qtr and shall be largelydependent on how early or late can we restart the economy. Most projections are expecting a contraction of almost 20% in corporate earnings for the first two quarters and at par earnings for the next two.
However, the positives going forward are a bumper Kharifcrop last year and Rabi crop that we have just harvested and a normal monsoon expectation for the current year. More than 60% of India’s GDP is contributed by services and 90% of the workforce in IT and ITES which is the main contributor of the service sector is working efficiently from home today in the midst of the lockdown.
With the anti-China sentiment increasing on a daily basis,Indian exports can very easily double in the short term and many experts also believe this could potentially be a Y2K moment for several sectors like pharma, healthcare, electronics, auto and auto ancillaries, speciality chemicals.
The traditional valuation metrices like PE and PB may not offer an accurate picture today because of the uncertainty in future earnings impairment losses due to fall in asset prices. However markets are still available at cheap valuations as compared to long term averages and other indices like market cap to GDP ratio, earning yield to bond yield, etc.
Many stocks have hit the bottom but many stocks are still to hit the bottom. The market has been quite irrational and quality companies are also available at mouth-watering valuations; the market Cap of many companies is less than their cash equivalents or even EBIDTA.
b) Macros: India is going to be the biggest benefactor of the benign macro environment prevalent today. The savings from oil alone are going to be close to $50 billion or 1.7% of the GDP, which has also lead to a favourable BOP position. Interest rates are expected to remain mild with a further cut of 50-75 BPS expected in the next MPC meeting. We have sufficient reserves of more than $475 billion to tide over any immediate concern. With bumper harvests , normal monsoon, low oil and commodities prices, demand contraction shall all lead to a milder inflation scenario.
c) Liquidity: the world is awash with excess liquidity with interest rates having fallen to near 0% in many developed markets including the U.S. In the Indian market, RBI has also injected more than Rs 5 lakh Trillion of liquidity in the markets to thwart any liquidityproblem faced by the system. The RBI governor in his last report confirmed that banks have parked more than Rs 6.7 Trillion with the RBI because of the abundance of liquidity in the system. For want of other opportunities and attractive stock valuations, even the PE&VC funds have started investing in direct equity of listed companies.
d) Sentiment: In the middle of acute uncertainty, The consumer and investor sentiment is weak and the Bears are largely ruling the market. Any positive development on the Covid 19 front, news of Financial stimulus by the Government restart of the economyshall provide a positive stimulus to the sentiment and see a spurt in the stock prices.
The answer to the question, “Has the market hit the bottom” is; “nobody can predict the market in the short term.” As an old saying goes, “ Only two people what will happen in the market in the short run, One is God and the second is a Liar” and as another saying goes, “ Bull markets have no tops and Bear markets have no bottoms.” Panic and fear can lead the market to totally irrational and unchartered territory in the short run.
However, in the medium to long term, value can only be derived from the growth story and consumption story. Purchases may get postponed, priorities may change but the fundamental Indian growth story remains intact. With the supply chain rebalancing Post Covid, Anti-China sentiment both for FDI and FPI allocation getting a boost especially in a US election year, ultra benign macros, Excess World liquidity at near zero interest rates and a progressive democracy with decisive leadership with a strong resolve to revive the economy to greater height, all give India the best potential to reap the harvest in the Post Covid global economic scenario. If we cannot substantially increase our share of the world trade from the dismal less than 2% today, we will not have anyone else to blame but a crisis gone waste for us. Exports oriented sectors will and should provide the leadership in the next leg of the rally.
Hence, given the uncertainty which lies ahead in the short term and the expectation of a new “Normal” in the medium to long term, “Where should you be investing today?”
As Warren Buffet says, “ When the time comes to buy, you don’t want to. The best time to buy is when others are selling because that is when great values are available and equities are cheap, but alas the factors that render others averse to buying will affect you too.”
I think it is time to get back to the basics and ask yourself the following questions first.
- Do you have a contingency fund to last you 6-9 months of expenses safely parked in a liquid investment?
- Do you have sufficient health insurance also covering the unknown pandemics for yourself and your family ?
- Are you sufficiently covered with a Term Insurance of 10-15 times your annual expense plus debt if any, to take care of your family in case of any eventuality in these morbid times.
- Are the funds required to meet your financial goals occurring in the next 2-3 years invested safely in low or zero risk debt instruments?
If the answers to all of them is yes and you have a surplus left over, comes the next stage of investment strategy.
The first thing to do is to relook, rework and finalise your Asset Allocation strategy based on your risk taking ability, years to goals, the corpus in hand, the number of dependents and earning members and many such factors. It is best to consult a financial advisor who can help you formalise a strategy and stick to it.
Everything else can be quantified but the risk taking ability is most subjective and personal. We have seen the so called Big risk takers shift stance at the sight of a simple correction leave alone a crash in the market. It all depends on how much pain you can take and absorb in a depleted portfolio and a notional loss. Some have a stomach for it but most don’t, it all depends on the conviction level in the market and the stage of your investment cycle.
In today’s time, the most important thing you can do is to strike the appropriate balance between offence and defence. One way to think about the balance between an aggressive and defensive strategy is to consider the, “ Twin Risks investors face every day; the risk of losing money and the risk of losing an opportunity of a life time.”
Don’t lose the golden opportunity available for the long term investor; Investors always want to sell at the top and buy at the bottom, this time make peace with buying at 10-20% higher or lower, don’t try to time the market, nobody can do it.
The odds seem to be with the investor now. The investor goal has to be “ to make a large number of good buys and not just a few perfect ones.” The market is cheap today based on the relationship between price and intrinsic value. You should start buying in small lots as uncertainty and panic can lead the market to lower and irrational levels. Hence don’t risk and commit your money in one go; I’d rather buy at 10-15% higher average price rather than risk losing patience at a lower price and exiting in panic at a lower price. In 2008, more people lost money when they bought at 15000 and exited at sub 10000 rather than those who were doing regular investment through SIP etc in the entire bear market phase from 2008 to 2010.
Finally, I shall like to end with the following:
- Lower your return expectations as interest rates are heading lower and market generates a CAGR in relation to the interest rates, bond yields and risk premium thereon.
- Invest a portion of your corpus in Gold through a SIP in an ETF or a similar non-physical product as Gold is the best hedge against equity and more so in uncertain times.
- Keep cash with you, have liquidity not only for meeting any contingency but also to reap the many opportunities this market is likely to provide in the near term. Don’t at the slightest feel that you may have missed the opportunity, remember this market never disappoints and always gives you an opportunity, you just have to have the patience.
Every crisis brings with it some unseen opportunities. Every crisis also tests the limits of our resilience. Amid mathematical models and economic projections, one powerful factor is often overlooked: the power of human optimism. While India’s business may still only be a small portion of the larger economy, if we are looking for hope, they may be a good place to start looking.
There are a number of unknowns on the business front. There is no line of sight on how long this shutdown will last. Views on the shape of recovery vary from V shape to U shape to L shape.When will the rebuilding begin is uncertain,but one thing is clear: Many Business owners that we have come across are prepared, optimistic and believe they have it in them to bide this crisis.
Despite the gloom and doom that you may be seeing, remember that, “ Tomorrow always comes.” Nothing is permanent in this world, not even our problems, the troubles or the crisis the world is facing today.
The trigger and the ingredients of each crisis may differ, but the language and script tend to be familiar. Bad things happen, they happened in the past,they will happen again,but life picks up, then we forget, and we go on. Till the next crisis hits, stay the course, but do reflect and learn the lessons. As Rahm Emanuel, Barack Obama’s Chief of staff said after the 2008 Sub Prime meltdown, “Never waste a crisis.”
“All great investments begin in discomfort and there is great discomfort today.”
Invest wisely, stay safe, stay healthy and stay blessed forever.
May God be with us.
Happy Investing!
Sandeep Sahni
Note: All information provided in this blog is for educational purposes only and does not constitute any professional advice or service. Readers are requested to consult a financial advisor before investing as investments are subject to Market Risks.
About The author
Sandeep Sahni
Sandeep is an alum of IIM Lucknow with a Post Graduate Degree (MBA class of 1988). His also an alum of Shri Ram College of Commerce, Delhi University (B.Com. Hons. Class of 1985.)
Sandeep's investing experience and study of the Financial Markets spans over 30 years. He is based in Chandigarh and has been advising more than 500 clients across the globe on Financial Planning and Wealth Management.
He has promoted “Sahayak Gurukul” which is an attempt to share thoughts and knowledge on aspects related to Personal Finance and Wealth Management. Sahayak Gurukul provides financial insights into the markets, economy and Investments. Whether you are new to the personal finance domain or a professional looking to make your money work for you, the Sahayak Gurukul blogs and workshops are curated to demystify investing, simplify complex personal finance topics and help investors make better decisions about their money.
Alongside, Sandeep conducts regular Investor Awareness Programs and workshops for Training of Mutual Fund Distributors, and workshops and seminars on Financial Planning for Corporate groups, Teachers, Doctors and Other professionals.
Sandeep's investing experience and study of the Financial Markets spans over 30 years. He is based in Chandigarh and has been advising more than 500 clients across the globe on Financial Planning and Wealth Management.
He has promoted “Sahayak Gurukul” which is an attempt to share thoughts and knowledge on aspects related to Personal Finance and Wealth Management. Sahayak Gurukul provides financial insights into the markets, economy and Investments. Whether you are new to the personal finance domain or a professional looking to make your money work for you, the Sahayak Gurukul blogs and workshops are curated to demystify investing, simplify complex personal finance topics and help investors make better decisions about their money.
Alongside, Sandeep conducts regular Investor Awareness Programs and workshops for Training of Mutual Fund Distributors, and workshops and seminars on Financial Planning for Corporate groups, Teachers, Doctors and Other professionals.
Through his interactions and workshops, Sandeep works towards breaking the myths and illusions about money and finance.He also writes a well-read blog; : https://sahayakgurukul.blogspot.com https://www.sahayakassociates.in/resources/our-blog
He has also conducted presentations, workshops and guest lectures at Management institutes for students on Financial Planning and Wealth Creation. He can be reached at:
91-9888220088, 9814112988
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Your thoughts are vital to the health of this blog and are the driving force behind the analysis and calculators that you see here. We welcome criticism and differing opinions. We will do our very best to respond to all comments ASAP. Please do not include hyperlinks or email ids in the comment body. Such comments will be moderated and we reserve the right to delete the entire comment or remove the links before approving them.
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