How do investors deal with coronavirus?

The Coronavirus or Covid-19 has brought life to a standstill to almost every part of the world. The virus which originated from China’s Hubei province has claimed more than 50,000 lives so far with over 1000000 cases globally. With cases increasing in India over the past few days, we can expect this number to run into thousands as more people get tested.

Businesses in various industries like pharmaceuticals, automobile, aviation, tourism, restaurants, multiplexes etc will most certainly bear the brunt in a pandemic situation as such. Businesses with supply chain exposures outside India will encounter a lot of problems in running operations.

As there are brakes been applied now to the economic engine, wondering how Earnings will pan out in the next quarter? Well they are going to look abysmal. Even the companies that are market leaders with well-run managements are likely to show a significant drop in earnings. Things should stabilize in Q4, but what should common investors like you really do?

A look at the chart shows, from 1990 to 2020 the Nifty has seen 10 corrections of over 20%, that is only one every three years. All previous corrections have provided good buying opportunities. However, this time around, investors are concerned that this could be a prolonged economic slowdown across the world. We are already down by 30% from the high of January 14. There are several uncertainties revolving around the current situation. How effective will the 21 Day lock down be? Will there be a vaccine for the virus?


A walk down memory lane

Past data suggests that the following an outbreak, Indian markets have bounced back sharply. So, one thing clearly stands out

‘Past epidemics are short term setbacks and their impact fades over a period’

But what do I do about my portfolio? Should i buy, hold or sell?

Investors are confused and probably most of your portfolios are in red. From family and relatives to neighbors and friends, from news to social media, there are tons of people offering you advice.

The only solution here is to sit back and think with a sane mind.

No one has any clue about what will happen in the short and long term. The most sensible advice here would be to start new. Take a paper and pen, jot down all the stocks in your portfolio. Don’t consider cost price, current market price, amount of profit or loss.

Ask yourself these questions about the stocks you own, ‘Do I know the business model, products/services of the company, valuations, management quality, competitive advantage?’

If you have answers to all these questions and after the current mayhem in the markets, nothing has changed about the stocks you own, HOLD THEM and buy on dips.

If you don’t have answers to those questions. SELL THEM.

Which stocks do I buy during the current crisis?

Baron Rothschild, an 18th-century British nobleman and member of the Rothschild banking family, is credited with saying that “the time to buy is when there’s blood in the streets.”

If you are planning to enter the markets after the correction, I’d say it is a smart move. But what would you buy?

Would you buy stocks that led the rally to the previous high of Jan 14th? They surely might have done well, and a few months of shutdown wouldn’t change that.

“But wait, do you know what happened to DLF and Unitech, back in 2008?

Would you buy stocks that have fallen the least during the ongoing carnage? Maybe the markets feel that these businesses will do well and would be able to sustain this crisis.

Would you buy market leaders, delivering a consistent ROI over the long term and paying out dividends to their shareholders?

Each of these above statements make complete sense. At the end of the day it all depends on what you feel is right.

Here’s a list of stocks. Some of them are the strongest performers based on 1-year returns, some are solid business which seem to be good buys at current levels but have corrected due to the ongoing pandemic.

Disclaimer: These are not stock recommendations, but a base for all investors to begin their research. Apply all the questions above and check which stock fits well in your portfolio.

Do I need to allocate more debt to my portfolio?

As mentioned before, we are at a juncture where things can go in any direction. In the worst situation, markets may even see a further downside. Hence having the right balance of equity and debt in one’s portfolio is of utmost importance. If you are not sure, choose 50:50.

Another suggestion would be to have an emergency fund in place, keeping in mind the lockdown imposed.

I understand RBI’s announcement of a three-month moratorium of EMI’s would tempt a lot of you to defer loan payments. But, if you can make these payments, don’t pile debt.

Closing Thoughts:

Electric parts, chemicals, textiles, auto parts, almost everything is imported from China. This has made many countries like US, Germany, UK to become extremely import dependent on China for cheap imports.

The impact of coronavirus on the globe has woken up everyone. The ‘geopolitical risk’ and danger of being too dependent on one single country has finally been exposed to the world.

Once we get over the crisis, companies would look out for alternatives rather than being over -reliant on one nation.

I strongly believe India will stand to benefit from this.

China’s exports in 2019 were around US$ 2.4 trillion. In comparison, India’s exports accounts for just around 12% of that.

Even if 10% of MNCs currently dependent only on China, see India as a viable alternative, our exports can almost double. Imagine the amount of companies that will benefit, employment generation, investors creating wealth.

I was glad to read a recent article, where 200 US companies who were supposedly seeking to move their Manufacturing base from China to India.

Have a Look at this chart.

 From being highly isolated from the world, India opened its doors to the rest of the world. Exports started becoming a huge contributor to India’s GDP. From contributing around 7% in 1991, exports now make close to 22% of the GDP.

I believe India will fight this out and emerge victorious.

“It looks bad today. It might look bad tomorrow. But hang in there. We’ll get through this” – Morgan Housel