Fear and panic are not the equity market's best friends. The 3 C's - coronavirus pandemic, crude oil slippage and the credit risk averseness witnessed are cumulatively causing panic on the D-Street, Mayuresh Joshi, Head of Equity Research - India, William O'Neil India, said in an interview with Moneycontrol’s Kshitij Anand.
Q) The Sensex broke below 30,000 to hit a fresh 3-year low and is down more than 12 percent in the week ended March 20. An enormous amount of wealth has been already eroded. What is causing the panic in the market, is it fear driving it downwards?
A) Fear and panic are not the equity market's best friends. The 3 C's - coronavirus pandemic, crude oil slippage and the credit risk averseness witnessed are cumulatively causing panic on the D-Street.
The magnitude of the unknowns as to how the contagion might spread further and when it shall peak is causing enormous disturbances in lockdown areas across the globe.
This is leading to the widespread expectations that global GDP might taper downwards and have a cyclical effect in terms of economic activity.
Additionally, job markets, as well as various industries, feel the pinch as the demand curve starts coming off. Though central governments and regulators across the globe are placating and soothing investor sentiments with huge liquidity doses for the probable economic fallout in the weeks and months to come, the markets are singularly focussed on the entire coronavirus threat.
Crude slipping with the Saudi-Russia deal off the table as demand is expected to contract across the globe has added to the panic and the earnings downgrades for various sectors have also contributed to the incessant selling witnessed.
Q) What would you advise investors who are left with bleeding portfolios even if they have invested in mutual funds?
A) Investors who are invested in mutual funds have done so with a long-term objective, and with dual goals of beating inflation and other asset classes.
Though equities might have underperformed in the short-term and the near-term cyclicality plays out in the markets, the long-term returns as historically proven have delivered comparatively better returns.
Q) Gold and Oil and equities all moving in one direct – what does it tell us or how should investors decode this?
A) It is indeed very surprising as Gold is one of the safe-haven assets in terms of crisis, as equities and oil will still be moving southwards for reasons mentioned above.
The only plausible explanation is that the severity and unknown duration of the economic stress is causing financial and economic deleveraging across asset classes.
Q) Many investors want to take advantage of the fall in the markets but have no fire powder – what would be your advice?
A) It would be an ideal situation for investors to start a small SIP to take advantage of the market fall and average the purchases over a period of time.
Q) FIIs have been pulling out money from markets across the globe and India is no exception – what is troubling FIIs – is it the margin pressure redemption, ETF selling or just that smart money moving towards safe havens?
A) The uncertainty in terms of the financial and economic deleveraging happening across the globe is prompting FIIs to trim their riskier asset exposures including equities and moving towards safe havens and treasuries.
Q) With recession fears looming I think investors could say goodbye to an earnings recovery for at least 2 quarters —what is the kind of earnings cut you are factoring in amid slowdown?
A) There is bound to be an earnings hit amidst the supply constraints and demand is expected to recover gradually. The Q1 numbers shall obviously take a hit and certain sectors such as travel and hospitality, film exhibition, the leisure industry, Capital goods industry might feel the brunt which is sharper compared to the others.
Generally, there is going to be an earnings hit and the annualized earnings for this fiscal shall be trimmed down. Index earnings hit can be to the tune of 8-10% with the caveat that things might normalise over the next few weeks, for if it lingers longer we might be staring at deeper cuts.
But, the consensus is pointing to a higher single-digit annualized earnings hit.
Q) Some analysts suggest that Covid-19 is nothing like that what financial markets have faced in the past – so the outcome for financial markets would not be similar. It has far-reaching effects than previously seen epidemics. Does that mean to stay away from equities?
A) Yes, the financial crisis in 2008 had known factors but here we are staring at a Tsunami in the form of the coronavirus which has no possible solution as of now.
The logic of the unknown and the contagion risk has shuddered the equity markets. Unlike other epidemics in the past where market correction ensued, this correction has been brutal. Our take is to let the markets stabilize for a few days.
In fact, 3 days of consistent price action with volumes would justify that the markets are attempting a 'rally' and as a follow-through day which follows this time horizon. This takes the price and volume action stronger and in a more positive zone.
The markets would be in a strong and stable territory. So, one needs to stay in equities depending on his/her % diversification and shortlist companies having a strong earnings pedigree, where chart bases have developed strongly along with RSI movements and enter at the opportune time as mentioned above.Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.