Harshad Patwardhan
The past month was brutal for the Indian equity markets. The Nifty50 collapsed over 30 percent, making it one of the worst monthly performances ever.
The markets appear to be gripped by extreme panic. The Volatility Index or India VIX (a widely followed fear gauge) exceeded the level last reached at the peak of the Global Financial Crisis in November 2008.
So the panic in the markets has reached a peak. But, is the situation today as bad as what was experienced in 2008?
A problem with assessing damage from the current crisis is that it is not an event but a fast-evolving condition. It will impact both demand as well as supply and it is hard to fathom its extent and duration- leading to fear of the unknown.
Often, when we are in the middle of a crisis; it is easy to overlook the effect of countervailing forces that are unleashed by the policymakers.
We are beginning to see a coordinated monetary and fiscal action by the central bank and the governments. While the Indian markets seem to have shrugged off these measures so far, we believe policymakers are in the mood to do whatever it takes to stabilise the situation.
With so much of negativity, it is also easy to overlook the two positives that have emerged. Firstly, oil prices have collapsed. This is a huge positive for India. It is good for the current account, fiscal balance, inflation and interest rates.
Most importantly, it gives the government much-needed headroom to do targeted spending to tide over the current situation.
Secondly, with a sharp downturn in stock prices, valuations are getting attractive, even compelling in some cases.
Overall, the Nifty for a long time was trading at a premium to long-term trading averages, and is now available at a discount, even after accounting for a potential cut in an earnings forecast.
So, what should investors do? Here is what we think:
While negative emotions are running high, we believe this is perhaps the worst time to exit/redeem equities. An exit in a panic now will likely lead to regret from a medium-term perspective.
While prices have fallen off the cliff, we would caution that it is also risky to invest all your investible surplus at one go. The crisis is far from over and we do not know where the bottom is.
The most prudent and rational course of action is to use the current prices to start investing (given a good risk-reward available) but to do so gradually over a period of time.
The author is CIO, Equities, Edelweiss AMC
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