To answer, we have to first take stock of the situation. By all indications, the pandemic is just about getting started, and it’s scary already. The virus is very infectious, and can spread easily. And it doesn’t kill quite that much, except for older people, for whom fatality rates are high. This is scary because it can spread to a lot of us, quickly, and overwhelm the medical system because we simply don’t have enough hospital space.
The solution is to delay the spread of the disease by “social distancing"—where you don’t allow people to gather and thus spread the disease until the hospitals have caught up on the action. This had led countries, like Italy, to completely shut down all commercial activity other than essentials. Others, like China and South Korea, are coming out of their situation.
India, too, is starting to see cases. It’s early, but there are cases. So many states have slowed down economic activity, closing schools and banning pubs, weddings, meetings and sports events. More will follow, as cases begin to pile up.
The slowdown in economic activity is huge and can get worse. As the number of bans increase, we’ll see real problems in many areas: people who work for a daily wage (no earnings), businesses that have no revenue (due to a ban) but must still pay rent and costs, and finally, people who have no savings to deal with a crisis.
In this situation, expect a lot of panic. Infections will increase. So will the count of the dead. In effect, there’s a lot more to come.
No wonder the stock markets have tumbled. The strong efforts by central banks to respond haven’t helped much, primarily because the world is choosing to halt the economic engine and expecting it to restart a few weeks later. In the meantime, there will be a lot of damage—to the poorest, the marginalized and even the relatively well-to-do businesses.
To mitigate this, governments will need to support all their people through spending and forgiveness of loans. And the central banks will not just have to cut interest rates, they’ll need to eventually buy out government debt for the spending to be financed. It’s not nice, but they will all have to do it.
Stocks will be unhappy—at least for a while until we get things going again. But the human race is super-resilient, and we will fight back to normalcy. This time, it could take a few months before the panic dies out. But here’s the good part. We will come back, and things will go back to normal, even if it’s a normal when people don’t shake hands anymore.
If we are in agreement that humankind will recover, eventually, then only two questions matter: How long will a recovery take and how much more will the market fall?
These questions have the underlying assumption that you can time an entry good enough so that you can get in right at the bottom, and then ride your way back up. This is easy to say. In 2008, I waltzed into the market when it was 35% down from the top (for context, as of Thursday, we are only about 34% lower). I watched my investments fall another 40% in less than a month. And then I added a little more. And then I watched in horror as the market fell yet another 20%.
Anyone who believes they can catch bottoms at an extreme has no idea how your gut lining totally dissolves when there is panic in the market.
More important is to understand that when you start entering the market, one has to think five or ten years ahead. And then, one should invest systematically rather than all at once. This gives one time to be able to add more if stocks were to fall, but also to be able to participate if they rise.
The current stock market valuations are roughly as if you slept for the last five years and woke up just now. The market’s at the same level. You’ve gotten the last five years of economic growth, but no growth in the portfolio. This doesn’t mean you’re getting things cheap, but it’s definitely no longer as expensive as it was in 2015.
Roughly, the gross domestic product (GDP) has grown 74% (nominal) since 2015, and the stock market has fallen to where it was then. In a manner of speaking, you’re getting 74% GDP growth free if you’ve just started to invest.
That GDP growth has hit a wall and fallen below 5% in inflation-adjusted terms. And at the same time, Indian businesses have reduced leverage, not adding to overall corporate debt since 2016. Banks have, overall, reduced their non-performing assets (NPAs), through resolutions, write-offs and recoveries. The Bankruptcy and Insolvency Act has made business transition easier, and scared willful defaulters into paying up.
Then, there’s the lack of inflation. Even though we saw onion prices spike to ₹200 per kg recently, prices have fallen back to ₹20 a kg. Crude oil prices are down nearly 40%. Bank credit growth is just 6%, around the lowest it has been in 20 years. There’s more deflation coming, if you look at job losses, or shutdowns. Worldwide, central banks have cut rates, and the Reserve Bank of India (RBI) might follow through soon.
It’s still precarious. The economy will tumble through the next two quarters. The recent Yes Bank rescue could demand the rescue of other weaker banks. Bad loans have largely been corporate, but the situation right now could turn retail loans into defaults. The slowdown in the world economy will result in lower exports and manufacturing activity too.
And it could get a lot worse, because who knows where it ends really. But the point about investing isn’t to find bottoms. It’s to invest when you think there is scope for good long-term story, even if you lose money in the short term.
That timing question again
The difficult question is—do you pile in now, or wait for some more confirmations? If your fear is that you’ll miss the first 20% of a rally, think again. It doesn’t matter, if a stock will go up 5x, whether you bought at ₹100 or ₹120.
The obsession with having to time a bottom is extreme. However it is also unnecessary. There is only one way to time the market right—by timing it wrong ten other times. For the non-active investor, the best mechanism is to now increase the amount invested, but to deploy it systematically over a period of time.
The Nifty Price-to-Earnings Multiple, which typically indicates how many years of earnings you pay when you buy something, is now down to 16 from the levels of 25. This level is also fair, but not ultra cheap just yet, considering earnings will also reduce in the next few months.
Historically, the market falls in waves. The first wave is just the first, it’s the one where people want to tell you all the good things about the market and put in more money. A pullback usually ensues, resulting in a rise that covers about half the fall or more.
And then, the market crushes downwards again, even further below the last low. This time, however, we saw the market run down without a proper pullback. If it does what it has done historically, then a turnaround in the markets may only be temporary. It will be prudent to allocate money only over time and not as a lump sum, even if there is a rebound now.
The punting game
It’s too early to decide which sectors “benefit" from the coronavirus. A drug-maker may look good, but the government may force the drug to be sold at cost. A movie company may look bad, but all the movie producers are bunching up movies for later this year when the crisis is likely to be behind us, and the rebound in earnings could be big.
Where are the losses in the markets coming from? The biggest seller has been the foreign institutional investors (FIIs). The markets abroad have been pummeled too, and it’s a major global risk-off situation that’s driven money out. For India, FIIs own around 50% of the non-promoter shares in the market, and nearly all of the large private banks. When they exit, the hole they leave behind will need a domestic investor to fill it up, and it appears that the large institutions (LIC, mutual funds, and insurance firms) are slowly beginning to step up, as are small retail investors too. However, the carnage can continue for a while, and what’s down 50% can easily drop another 20%.
It also means that the sectors which foreign investors favoured will be the ones hit the hardest. Markets overstretch in each direction, so what you need to look for are companies that can hunker down and survive through this crisis. There are no templates today, but companies with low debt, relatively less dependence on people (more technology) and enough cash will survive.
At the same time, the prospects around noteworthy companies will change when government and regulators take action. At a much lower interest rate, a company that has debt (or can take on more) can become much more attractive.
Even in these times, around half your “bets" will turn sour. Only a few companies will give you enough returns to justify your time. Those returns could give your overall portfolio an excellent fillip. But those may be too difficult for a layperson to analyse and learn, and the fear of losing money will make many an investor pull out too early. To avoid this, the simpler method of investing through an index or a mutual fund, and investing over time rather than all at once, may be superior.
Most of us want the bragging rights to say we bought stock A when it fell to ₹6 and look where it is today! Yet, in my experience, such trades are built over the graveyard of a hundred others that didn’t work out. Remember, an investment at ₹6 that falls to ₹3 is a 50% loss, especially if you went in really big on it.
Panics will come and go. We might remember some of them. Coronavirus will surely list as one of those things that made us panic. But if you believe that humankind will prevail, and come out stronger, it’s the time to think about building a long-term portfolio, knowing well that the well runs deeper than we can see.
As long as you wash your hands, stay healthy and keep a little aside to help the poor and marginalized through this crisis, the stock market should come out stronger.
Deepak Shenoy is CEO at Capitalmind Wealth. He writes at capitalmind.in and washes his hands often.