You and us both, are experiencing the tragedy that is the second wave of COVID sweep through the nation. This wave is leaving few untouched, unlike last year. With the nation’s biggest cities teetering under the impact, the effect on our economy has many worried.

This concern is reflecting in some of the questions we are getting from our investors. One of the key questions is whether they should convert their equity holdings to cash given the likely economic impact of the second wave and even a third wave as is being predicted by some.

This concern can be addressed by answering three underlying questions:

How will this second wave surge impact the larger Indian economy?

How will this second wave surge impact the Indian equity market specifically?

Finally, what are the prospects of Indian equity given what we know and what decision makes the most sense at the moment?

Question. 1 How will this second wave surge impact the larger Indian economy?

What we believe

That there will be an impact on the economy is nearly certain. The extent of the impact will depend on the length of this wave. Experts are not really sure when India will see a peak, but what they do seem fairly certain about is that the economic growth rate may go down from the previously estimated 11% to something closer to 10%.

Question. 2 How will this second wave surge impact the Indian equity market specifically?

What we believe

April saw the equity markets behaving as if India wasn’t facing a gargantuan healthcare crisis. The Nifty kept inching up despite the rising caseload with some hardly believing what they saw.

Divining the short term behaviour of the equity market can be an exercise in futility as the reasons you ascribe today might be irrelevant in a week or two. Liquidity, interest rates, company results, international market performance, election results all have a say when it comes to a period of months or a couple of years. As we write this, the equity markets are showing some weakness and volatility which could be perhaps ascribed to election results as well as the rising caseloads. 

Will there be an impact on the Indian equity market going forward?

Probably yes, given what we saw last year. The scale is uncertain as of this moment given what we are seeing.

Question. 3: Finally, what are the prospects of Indian equity given what we know and what decision makes the most sense at the moment?

What we believe

The growth rate of our GDP or the overall economy no matter how you want to measure it matters the most in the end. There will be tens of other factors that are but jargons to most investors that will have a minor say, but the growth of the economy as evidenced by the actual growth of companies that will decide the long term trajectory of any nation’s equity markets. 

Right now, the factors helping the long term outlook of the Indian economy and thus the equity markets such as demographic advantage, growing income levels, low penetration of financial assets, long runway for growth, the ballooning consumer class, etc continue to remain in place. It’s too early to say whether the current crisis will change any of this more than temporarily.

Now, should you look to reduce your equity allocation given what we know?

As we wrote in March of 2020, here, the markets have recovered from each and every crisis. What has differed is the time taken to recover. To be honest, no one should invest in equity if it were otherwise. Economic growth is a long term exercise and so is equity investing.

Knowing this, and irrespective of what we see the markets do today or in the coming months, taking money out of equity is not ideal unless you have no other option for liquidity

Having one year’s expenses in a liquid fund as an emergency fund is the key need of the hour. Ensure this is in place.

Finally, assume you are going to see a lot of volatility in the stock markets. What works best in such situations is to have 6-12 months of your expenses in good quality and conservative debt or liquid funds. This should provide some peace of mind.

Rudyard Kipling in his poignant poem “If” emphasised the importance of keeping one’s head, will, and senses during a crisis. It’s advice we all can use. As we all do our best to ride out this crisis, we wish you health and safety. Take care of yourself and your family. That’s why most of us invest after all.