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Last Updated : Mar 18, 2020 01:29 PM IST | Source: Moneycontrol.com

Coronavirus infects market: Why small investors need to ignore expert advice

In my view, regardless of the alarm bells sounded by many experts, the coronavirus outbreak may be declared under control latest by the end of April.

A member of a non-governmental organisation puts a face mask on a man as a precaution against the spread of coronavirus, at a traffic junction in Ahmedabad, India, March 16, 2020 (Reuters)
A member of a non-governmental organisation puts a face mask on a man as a precaution against the spread of coronavirus, at a traffic junction in Ahmedabad, India, March 16, 2020 (Reuters)

As a small investor in Indian financial markets, I am struggling with numerous issues these days; and trust me the coronavirus (COVID-19) pre-recorded message that I have to hear every time I make a call to my broker is the least of my concerns.

My mailbox and social media timelines are inundated with a variety of advice. Many experts and veteran investors are guiding me to duck and let the storm pass over my head. They are highlighting that in the past whenever the market witnessed this kind of turmoil, the investment values recovered much more than whatever was lost during the period of disturbance.

Most of them are citing the example of the market crash of 2008-09 when the sub-prime crisis of the US credit market became a global pandemic threatening sovereign defaults in peripheral Europe and the breakdown of the common European market.

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The melee that followed the collapse of US banks such as Lehman Brothers and Merrill Lynch, the credit default swaps of the backbone of India's financial system SBI and ICICI Bank implied a total breakdown. A year later everything appeared normal and we had the longest uninterrupted bull market in US history. Indian assets also did fairly well.

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However, there are technical analysts, financial astrologers and doomsayers who are confident that the conditions are going to worsen materially and we shall see substantial erosion in asset prices over the next few months.

This morning I feel like the Shankar of 1957 blockbuster Naya Daur. I am a poor tonga wala and the entire village is instigating me to compete with Kundan who owns a new lorry. They want me to race with the lorry riding my tonga. The only difference is that in the movie, the entire village got together and constructed a new road cutting through the hill to make a short cut for the protagonist Shankar. Here the experts are only tweeting and giving interviews to the media to encourage me. It's not helping at all.

The central banks the world over seem to be in emergency mode. The US Federal Reserve has cut the rates close to zero and announced a substantial monetary easing. Investors in India are also eagerly expecting the RBI to announce some emergency measures, besides a $2 billion swap to arrest the India rupee slide. The government appears concerned and active insofar as COVID-19 spread is concerned. However, we have not heard any economic measure to obviate the stress caused by the slowdown in economic activity due to the virus. This is perturbing because the economy was struggling even without the COVID-19 impact, and unusual weather has caused extensive damage to the crops all across north India.

I have therefore decided not to get swayed by the expert advice. I shall rely on my learning and experience and do what suits my pocket and the temperament best.

Having witnessed all major market disruptions (due to wars, epidemics, economic crisis and scams) in Indian markets since 1990 from inside the playing area, my personal assessment of the current situation is as follows:

Impact of COVID-19

The coronavirus has spread to a large number of countries. Even though the mortality rate of patients suffering from the virus may not be high, the transmission is much faster, and it threatens large scale immobility or people and disruption of business. In that sense, it is perhaps one of the most disruptive pandemics for the modern generation. The spread of bubonic plague in the 19th century and Spanish flue in the early 20th century (though these had massively higher mortality rates) could be the only appropriate parallel to this.

The indications from China are that the Chinese authorities are in full control and new cases of infection are negligible now. The businesses have started the process of normalisation and in 4-6 weeks shipments could return to near normal level. Similar indications have been received from South Korea, Hong Kong, Singapore, Vietnam, Taiwan, Thailand and Malaysia. The number of cases in heavily populated South Asia (India, Bangladesh, and Indonesia) is so far well within control.

In my view, therefore, regardless of the alarm bells sounded by German Chancellor, WHO, US authorities, and European Commissioner, the coronavirus outbreak may be declared under control latest by the end of April.

So far there is little indication that the spread of coronavirus may have impacted the household income significantly. The impact on household consumption may not be material, or at least not permanent. At worst, we may see some deferment of the demand until the conditions normalise.

As of now, there is little indication that the disruption may cause any significant change in business practices and procedures. Redefining necessary travel, work from home and virtual meetings are some trends that may not be materially stimulated by the coronavirus. I expect these trends to follow their normal trajectory.

The business disruptions caused by the coronavirus-related developments could potentially prove to be fatal for many microbusinesses as well as many large businesses. For example, a small eating joint may default on its debt repayment obligation and face closure. Similarly, many large businesses that are already stressed may breach the fault line and become defaulters. The financial sector will have to deal with this. The role of a regulator would be critical in managing this situation. In the resolution of Yes Bank, we have seen that the regulator is willing and prepared to walk the extra mile and take unconventional diversions also. I am therefore not too uncomfortable on this count.

Investment strategy is crucial

The Indian economy and therefore financial markets are passing through a major transition for the past 3-4years. The state patronage to businesses is being withdrawn gradually, leaving them to compete on their own strength. The businesses which traditionally survived mostly on state patronage are finding it tough to survive and are perishing fast. The mortality rate of even large businesses is very high.

I did recognise this trend quite early and restructured my portfolio accordingly. I do not see much impact of COVID-19 on the businesses I am invested in. To that extent, I do not see any need to change my investment strategy.

I am fully cognisant of the fact that I am a tonga rider. I cannot venture on Mumbai-Pune expressway and compete with BMWs (Damanis) and Mercedes (Jhunjhunwalas) racing fast there. I shall stick to my path and not try any adventure by buying any stressed asset.

I have learned it the hard way that if my portfolio falls by 33 percent from my cost, it would need to rise by 50 percent from the low for me to break even. I would rather buy 10 percent expensive, when the normalcy returns.

I have also learned the hard way that sectors that lead a market cycle usually underperform in the subsequent market cycle. Commodities in the early 1990s, financials in the mid-1990s, ITeS in the early 2000s, infrastructure in the late 2000s, and consumers in the past five years are some examples. Many star performers in these cycles (Andhra Cement, SAIL, VLS Finance, IFCI, IDBI, DSQ Software, Pentamedia, Suzlon, BHEL, Reliance Infra and JP Associates) did never recover their losses.

I would therefore not buy or keep something just because it has fallen 50-60 percent from its recent highs. My mutual fund portfolio will definitely change as per the times so I am not worried about that. My direct equity and debt holdings, I have already changed.

Technical view

I am no expert in technical analysis. I have been using my elementary knowledge of trend analysis for determining appropriate entry and exit points for my investments. For the current situation my technical view is as follows:

After four years of a strong run, the trend in Indian equities appears to be breaking. In my view, the monthly Nifty closing for March would very critical in assessing the future course of the markets. A monthly Nifty close below 9500 would open the floodgates, in my view. A close below this critical level may potentially correct the entire gains from February 2016 lows of 6925. However, if the Nifty rebounds from the current levels, closing the month above 10525 level, we can heave a sigh of relief and look forward to some decent gains in 2HFY21. A monthly close between 9,506 and 10,523 will keep the markets on tenterhooks for a couple of months more. I shall, therefore, be holding 15 percent tactical cash in my equity allocation until clarity emerges.

I sincerely apologise to the experts whose advice I have chosen to ignore in my investment strategy, for I am a small pony who has meager resources and is driven by the forces of greed and fear.

Vijay Kumar Gaba explores the treasure you know as India, and shares his experiences and observations about social, economic and cultural events and conditions. He contributes his pennies to the society as Director, Equal India Foundation. The views are personal. 
First Published on Mar 18, 2020 08:49 am
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