How should one cope with this selloff? You can get into endless reasons why markets have fallen, but the bottom line is how does one manage and cope up with this kind of selloff?
We have to recognise that we are all emotional people. We do get impacted by the drop in prices even though we believe it is temporary and in such kind of emotional stress, we should go to our advisor who can handhold us, who can show us 2008 carnage and say that look the same thing happened in October 2008 but because you remain invested you made money. He could also show the 2013 taper tantrum and say that look the same thing happened then but you make money if you stay invested. So, the most important thing is to recognise that emotional situations are greed and fear and then seek the right advice from the distributor.
Yesterday’s RBI press conference was nothing short of a standard communication when every central banker is showing urgency and aggressiveness. Do you think that was missing yesterday?
It is always easy to judge a person from outside but when you are in the driver’s seat, you have to take a call depending upon how things are turning around.
The pessimists can say the Reserve Bank did not cut rates like other countries and, on the other hand, if you are an optimist you will say that the Reserve Bank did provide another one lakh crore of liquidity which is equivalent to quantitative easing. If you are a realist, you will say that look here is a message from the Reserve Bank of India that we are watching the situation and we will take corrective action with all appropriate tools in our hands. My guess is that let us respect what the Reserve Bank of India is doing. They have more access to data than we have and they will make the right decision. Let us not forget that in 2008 the same Reserve Bank of India was working overnight. They were cutting interest rates. They were providing liquidity and from the mutual fund industry, I can vouch that even though under the law RBI was not supposed to provide finance into mutual funds, it took them just 24 hours to find a refinancing line which was passed via the banking system and it resulted in calming the markets. If push comes to show, in 2008 RBI delivered. It is the same team, same management, same institution. I am quite optimistic that they will take the right steps at the right time.
Even if the MPC does choose to bring down rates in say April policy, which the RBI governor did not really rule out in his press conference yesterday, do you think that would really do the trick or would you say that what one requires right now is a more targeted economic stimulus to try and churn up the economy? Will the government also have to step in?
Till yesterday, I checked with one of the largest cement companies in India and they said there was no disturbance in their demand of cement all over the country except some parts of Kerala. We are really trying to factor in the future, we are not talking about the past and the experience of shutting down the activity, locking down cities, shutting down the whole country clearly varies from sector to sector. There will be sectors like aviation, tourism, travel which will come under severe pressure. Sectors like pharma and medicine will actually benefit from this situation. Now, within this, the central bank, the government and the people all will have to come together. At the central bank level, cutting interest rates, providing liquidity, ensuring credit flow will be crucial. They will have to think of innovative steps like LTRO and like TWIST, maybe, something equivalent to TARP also. On the government side, they will have to ensure the law and order situation continues to remain and as much containment as possible happens for this virus. It will be like 2008 where the regulator, government and market will have to come together to give quick responses as the situation evolves.
As an investor what is the right approach? We say there was a 2008 and look at what followed 10 years after, drawing back even to 1987 because many are correlating the Dow crash yesterday to the 1987 crash. How is it that you get yourself down to buying this fear and do you buy this fear just yet or do you wait for the first signs of recovery to come in?
Undoubtedly, one will have to take a call depending upon what kind of asset allocation he/she has.
Let us assume that there is one gentleman who wants to go to 50:50 in equity right now because of market correction and under investment he is just at 20%. For him, there is far more leeway to invest in this market because he needs to put 30% of his wealth into equities. This is a great time to buy; we do not know where the bottom is and therefore do not put all the money at one go but try to invest on a regular basis over the next two-three months. Hopefully, you will average yourself into the market.
On the other hand, there is someone who also wants 50:50 allocation but he is actually 70% into equity. Now, this is a far higher allocation than he can afford; maybe he is leveraged and has taken futures and options positions. He should be focussing on cutting down his 20% despite great valuations to buy because you are already exposed to more than you can afford. One will have to take a call depending upon what is your risk appetite, what is your investment objective and what is your asset allocation.
If you are overweight do not increase risk at this point in time. If you are underweight, try to embrace risk but in a calibrated, gradual manner. Do not jump in at one go in this market because we never know where the bottom is. The market will first need a medical solution to this problem and then the financial recovery will happen.
Where is it that you would believe there is an opportunity for someone who has a fairly decent risk appetite?
As of today, fortunately, most parts of the market are available at below-average valuation. From Jan 18 level, Nifty is down about 12%, midcap is down about 32%, and smallcap index is down about 51%. Now with 51% correction, definitely smallcaps have become attractive. With 32% correction, midcaps have become attractive. Large caps there might be few stocks which are not as attractive because their valuations are still above average but the rest of the large caps have also become below-average valuations. You have a choice of investment across most of the largecaps, most of the midcaps and most of the smallcaps. When you are investing in small and midcaps there will be still more volatility, there will be high ups and downs in those portfolios. If you can grab or nibble at every level the small and midcap from a valuation point of view look far more attractive.
What about the risk when it comes to earnings revision? Where is it that you see the maximum risk of earnings erosion?
It does not require too much thinking to figure out that aviation will be the highest hit industry. Fortunately, both of the aviation stocks are not a very large part of the market cap but they do employ a significantly large portion of people. Next depends upon what kind of shutdown activity happens. If a city like Mumbai shuts down then maybe the impact will be far more on services industry than manufacturing industry but if we see clusters of industrial activity like Mumbai-Pune road or Mumbai Ahmedabad side shutting down, then the impact will be more on industrial activity. We spoke with the large cement company and till yesterday they were seeing normal growth in demand except for some small parts of India. So far we have survived the negative effect of COVID-19 and it does not mean that the future will be safe. The future will depend upon what kind of evolution happens on COVID-19 risks but till today by and large industrial activities, service activities have remained reasonably okay. There is an immediate impact on travel and tourism and aviation but the rest of the services industry, by and large, has remained the same.
Overall what is the market pegging in? Is the market trying to price in maybe two-quarters of earnings lagged now as opposed to these green shoots just about emerging in Q3?
I do not think the market today is able to forecast the future as convincingly as one would like it to. The situation is evolving on a daily basis. Undoubtedly, we all believe there will be appropriate policy responses. There are certain benefits that are coming to the Indian economy, for example, lower oil prices will save millions of dollars to Indian consumers, India Inc and the Indian government. The trade deficit with China will come down as global trades have slowed down and Chinese dumping into India will be curtailed. There will be higher liquidity and lower interest rates to support the economy and the benefits of that should start coming once this crisis comes under control. So, there is some silver lining to these dark clouds. The market will have to factor in the situation as it evolves over the next couple of weeks.
How much of a contraction in earnings and view of a global recession is in the price? When the bad news will start coming out along with Q1 numbers, along with Q2 numbers, will markets not react to that?
Undoubtedly, the market is forecasting the future and while it is not able to visualise the future as correctly as it should, it clearly has factored in many negatives. At this price, at these valuations, undoubtedly, much lower earnings growth or negative earnings growth in many companies has been factored in. But you will have to continue to see how the situation evolves. For every deterioration, there will be some policy response and then how does that commingle and how do they deliver in the future is to be seen. My past experience is that at the bottom of the market forms at the peak of the crisis because that is where people become most pessimistic. They discount maximum negativity and slowly the situation starts evolving for better. That is where markets start moving up. While the negative news continues to come, the market continues to ride because it has already factored in the worst situation. By and large, the thumb rule is that at the peak of the crisis bottom of the market is made.
