Is this a good time to Invest? Are you kidding me!
There are many articles floating around on this topic. I can promise you that you will learn something new.
On 4th March 2020, as I was heading towards a self-imposed lockdown for the next 12 days, I messaged my family:
I went for a 10 days intense meditation program called Vipassana. When I came back on 15th March 2020, the world was indeed different, not sure better or worse.
As I switched on my mobile, messages started pouring in from the investors. Everyone wanted to talk to me.
I checked headline indices; the market was down by 25% in just 2 weeks. In the next few days, it further declined by 15%.
My Vipassana timings could not have been better. The world was crashing but 10 days meditation provided calmness. It was time to understand the issues in more detail. On one side, fear of Covid 19 and on the other hand moratorium on Yes Bank by RBI.
I started reading news related to Covid 19. Most of the newspapers were just one-sided i.e. the world is ending due to Coronavirus.
I read about historical pandemics, did some data analysis on Covid 19 cases, reflected on the asset allocation and stock selection.
A couple of US medical institutes also indicated that the virus activity may decline due to high temperature and humidity. Clearly, those factors favoured India and other South-East Asian countries. Data from Thailand, Singapore, Philippines, Vietnam and Hong Kong somehow indicated moderate growth in comparison with colder regions including Italy, France, NY etc.
India was in a better situation both from the number of infected cases and timings. We had the advantage to learn from other country's experiences. The government took necessary steps including junta curfew followed by the nationwide lockdown. So, the question is "what next"?
The market fell by 40% in just one month. Although it has recovered a little from its lowest point but do we expect the market to fall further?
I did some research and found a paper published by Wharton. The stock market likes predictability and any form of uncertainty makes the markets nervous.
History.com also shares a lot of information on Russian Flu (1889) and Spanish Influenza (1918). Clearly, the market has reacted to Coronavirus more than previous pandemics. But maybe the market was expensive and it corrected to reflect a fairer price. Let’s evaluate.
One of the indicators, I prefer to use is to compare broader market earning yield (NSE500) with government security yield. Earning yield represents what the market is expected to deliver. Government security represents a safe return. This is a method recommended by Benjamin Graham in his book, The Intelligent Investor.
What we see here is that currently the government security yield is equal to earning yield. This level was last seen in 2008. Does that mean, the market will not fall further? The simple answer is - ‘I don’t know’ and probably no one knows. But we do know that the current levels are attractive enough and accumulation can start.
“Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble.” - Warren Buffet
Now, addressing concerns of specific groups:
1. Mutual Fund Investors: Market has fallen, exiting from mutual funds now may not be the best time. There is enough indication that the market might take some time to get back to its previous highs.
Fundamentals indicate that it is time to build the portfolio into equities. Do not stop your SIPs and continue to maintain your asset allocation.
In my opinion, there is a bigger concern in the debt mutual funds. In these situations, a lot of companies with debt may default, especially those that are not backed by cash flows. Even if they do not default, declining cash flows may cause credit downgrade, leading to mark to market losses in your debt mutual fund. It is advisable to move into government security-based mutual fund(s) (short term/liquid) or an arbitrage fund or a fixed deposit with a solid bank (SBI/HDFC bank etc).
2. Direct Equity Investors: The world is bound to change due to massive supply chain disruptions. Even after the lockdown is over, most of the countries may not open borders for regular travel due to the fear of new cases of Covid 19 that might get imported.
We must acknowledge that we are a highly populated country with high domestic demand. Therefore, a portfolio consisting of companies that have an Indian supply base as well as consumer base may do better.
The massive fall in the market provides opportunity to start building your equity portfolio.
Markets do not like uncertainty, once the outcome is certain, even a bad one, the market will stabilize and start reflecting fundamental values. If history can provide any clue, we have survived all catastrophic events.
This too shall pass.
In my opinion, it is a good time to start building your portfolio with a horizon of 3-5 years. Be prepared to see a lot of volatility in the coming weeks to months in both equities and corporate debt.
About my firm, Plutus Capital.
Recently, we have created tech-based investment solutions. The idea is to help investors grow their investments by keeping full control of their investments. There is no new account opening and the funds stay in the investor’s account. The tech-based solution includes All Weather Portfolio and Stock Advisory.
All-Weather Portfolio is based on my tactical asset allocation strategy. This includes a combination of Nifty 50 ETF, Nifty 50 Junior ETF, Gold ETF and Nasdaq 100 ETF.
Stock Advisory is a value-based investment approach. We identify 12-15 companies with low or no borrowing, 10-years history of 20% plus ROCE, high earning growth and available at a reasonable price.