Investors could see a sentiment shift once clarity and confidence emerge, of things getting under control, as markets are already offering lucrative valuations
India is facing a challenge from coronavirus, both socially and economically. Social distancing or suppression strategy, which is in force currently, is likely to yield benefits in slowing down the spread of the virus.
The model which is being adopted now, both globally and in India, is to contain the spread, get to know the number of people infected, build healthcare capacity to match infection rates and reduce it to manageable levels.
Alongside this, countries are also estimating the economic damage caused by lockdowns to provide equivalent or larger stimulus, so as to minimize hardships faced by citizens. This seems to be the consensus on which, markets are currently working.
Many governments in conjunction with their respective central banks have deployed a stimulus between 5-10 percent of GDP (estimating the loss in output), due to lockdown measures.
This has caused markets to de-rate in valuations and also discount a crack in earnings. The accelerated decline in the stock markets in March’20 is probably because of the mounting uncertainty about the duration of the lockdown, globally.
This has caused markets to de-rate aggressively and also price-in deeper earnings decline, probably split between these two aspects equally.
What could change?
Historically, most economic crises have been caused by excesses in some segments of financial markets, which in turn, have percolated into the economy.
Either it is the central bank’s policy of raising short-term rates too fast or some hot sector crashing after a reality check on expectations or sometimes a reversion to the mean in overall valuations of the markets.
The current crisis, however, is a medical problem that is being tackled by voluntary quarantine that is resulting in a sharp contraction. It is flowing from the economy to markets and not the other way around.
This is also a reason given which, many people expect the economy to witness a sharp recovery, once we get a grip on the virus.
This can be the case, only if and when the lockdown is lifted and the economy is given enough support by the government, to come back online. This remains, a work in progress.
What could we do?
The solution lies in the usage of technology. India has an attractive array of options to use technology to find solutions. The deep penetration of Aadhar, mobile banking, and internet usage, could help authorities in mapping out a solution, containing the spread of the virus.
If we keep aside the moral question of the ‘surveillance state’, because the problem to tackle is about humanity as a whole, we have the required infrastructure to make effective changes.
In specific focus areas or high-risk clusters, the government can use data from mobile phones, social networks or Aadhar, to ascertain citizens’ movements and visit patterns to deploy healthcare professionals to target those who pose highest to lowest risk, in the current scenario.
This can help the government to trace, test and quarantine people in clusters and stop any possibility of community spreads. The government’s effort to get this crisis under control is like fighting a battle on multiple fronts. Healthcare, economic and social aspects, could very well benefit from a powerful dose of technology-led disruption.
Investors could see a sentiment shift once clarity and confidence emerge, of things getting under control, as markets are already offering lucrative valuations.
More than 54 percent of the universe of stocks that we track, are trading in the bottom thirty percentile of valuations, nearing the total decimation last seen in the market crash of 2008.
Such valuation levels should be utilized to up one’s equity preferences in small chunks, during the course of correction. In such times, investors should protect their emotional, financial and intellectual capital, by using a staggered approach to investing. The fruits of such poise in investing, usually are beneficial.
(The author is Chief Market Strategist, Edelweiss Wealth Management)
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