A) The extension of the lockdown may have helped to keep the infection rate flat. It might also put less stress on the healthcare system overall.However, the economic stress is real where many sectors will have zero to limited revenue, and labour will be hard to retain or even procure when the economy opens up.
We will need to study sector by sector, business by business to understand how effectively each of them has managed to move along in this time.
Q) IMF suggests that we could see the Great Depression 2.0. What is kind of impact would that have on markets and the economy?
A) A label or a title was given to a crisis may make it seem more analogous to past economic shocks, but to be fair a global lockdown is a pretty unprecedented event.
Most industries are not geared to withstand a complete halt in business activity & it's also hard to plan for that. With a combination of stimulus packages and soft reopening and strict social distancing rules, many countries are experimenting with how to restart the economy.
Capital market investors need to take these signals into account from what's happening on the ground. If a business takes time to recover after the crisis is over, so be it, and our future expectations need to be adjusted to that reality.
In the short-term though, the market volatility can test our nerves.
Q) March quarter earnings are likely to stay muted. What are your expectations?
A) Forecasting is anyway difficult but it becomes near impossible in such volatile times. The March ending quarter wouldn't show much of an impact for businesses because we entered the lockdown at the end of the quarter.
Most manufacturing businesses would have inventory and operations wouldn't have been disrupted until the quarter ended. However, the commentary is what you'd expect, owing to the uncertainty, most have refrained from giving any revenue or profit guidance for the year.
Being cautious and focused on keeping the employees safe and business running seem to be on the top of everyone's mind.
Q) So if we are in a Great Depression-like situation, what is the kind of portfolio that one should work with?
A) There are many ways to build a portfolio in such a situation. We have opted to stay invested in businesses that have strong balance sheets, and even if their business is disrupted for a period of 3-4 quarters they have a chance to stay in business and get back on track once things go back to normal.
That means being exposed to more technology-driven businesses, strong retail franchises (private banks) in the financial space, automakers that have a healthy balance sheet, and a basket exposure to pharma.
These businesses have been around for a while, seen past crises, and have come out stronger. They have capable management teams that have demonstrated their ability to run the business well.
In the end, the valuations need to be reasonable to be comfortable to hold them in times of such uncertainty. We also have the benefit of owning some global technology giants with very strong balance sheets is also a source of comfort because the crisis hasn't rendered these businesses useless but they will surely face a short term shock to revenues and profitability.
Q) With the economy heading towards near Zero levels – do you think it would make sense to avoid small & midcaps as they usually get a booster from the economic activity?
A) Sector categories & averages sometimes hide some really good opportunities. Irrespective of the market cap of the company, if it's well managed, has a strong balance sheet, and can withstand a short term shock to its operations, it can be a good choice if valuations are attractive.
I think we need to filter opportunities far more carefully now and make sure that companies are going to survive first and thrive later when economic activity revives.
Q) Your two mantras for investors which could help them get through the COVID-19 storm?
A) It is clichéd to say this, but "Don't Panic" is a useful strategy. Volatility can be scary especially when our financial goals are affected. Use an asset allocation strategy that helps you to sleep well at night.
Seek help of an advisor if you can't do it on your own. Secondly, helping those in need can provide the necessary distraction from the daily onslaught of negative news from all over the world.
The lockdown can also be used to learn new things, take care of ourselves and our dear ones. Managing our temperament is key to this crisis.
Q) Which sectors are likely to turn out to be leaders and laggards of the next bull run?
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