As I write this, we are all feeling a sense of fear arising from uncertainty. The coronavirus counts are increasing around the world – thankfully still low in India. But this could change. In Bangalore, we’ve seen cases of offices being evacuated and over the next few days, your companies and state governments may take steps for social distancing.
This personal worry is also translating into a roller coaster ride for the markets, which are feeling the combined effect of 4 independent events:
- Global economic slowdown over the last year
- Coronavirus outbreak
- Oil Price war between Saudi Arabia, Russia & US
- RBI action on Yes bank
Tackling the easy one first. We feel that the noise around RBI’s action on Yes bank should be ignored. Because, to us, RBI’s action has once again demonstrated that as a country we have very reliable regulatory systems in place. This should in fact boost our confidence in banks rather than cause concern.
OK, but what about the slowing economy, oil prices & coronavirus? Shouldn’t one be worried?
In the short term, there is definitely concern and I wouldn’t be writing this if there wasn’t.
In the long term, which is what matters, there are 3 schools of thought
1. “Things are going to hell in a hand basket”
2. “There is opportunity”
3. And a more zen “we’ve seen this before”
I am in the “we’ve seen this before” camp because I really have, in my fairly brief (!) experience.
I remember my first month in my first job after IIM-B. It was July 1992 and the market was down 40% from its high just 3 months earlier (heard of Harshad Mehta? Yes bank is a tiny tickle compared to that). I was working for a young finance company and we were all worried about our jobs. The history of the stock market is a series of ups and downs (many sharp ones). These movements happen because the above 3 camps always exist in the market and on any given day one of them has more followers than the other. But none of them really know whether they are right.
Why I don’t think this is a crisis.
I believe that for an investor, the key issue to focus on is long term economic growth and coronavirus is definitely going to amplify the effect of the global slowdown. On the other hand, low oil prices are good for the Indian economy. So it’s difficult to answer the real question: What will happen after 12 or 18 months?
Since things are uncertain, this becomes a struggle between our logical self and emotional self. At a logical level, there is evidence to prove that economic systems are self-correcting and recover quickly but the coronavirus threat triggers an emotional survival response. The feeling of crisis emerges from that.
Is this an opportunity?
We are starting to see “this is the time to buy” kind of narrative. I personally am not a fan of that.
Opportunity can be of two types:
a. market opportunity at an equity asset class level with lower equity prices, and
b. specific sectoral opportunities – for example someone asked me, “is pharma an opportunity now?”.
I well designed asset allocation for your goals is superior to market opportunity based decisions. And as for sectoral opportunities, you should trust your fund manager to know that stuff and allocate your money appropriately.
So, don’t exit equities? Maybe just a portion of it?
No. If like most people equity is 20-30% of your wealth, any action you take – say exiting 50% of your equity portfolio will have a maximum 6-7% impact on your wealth and that too in a 50% market drop scenario. (Home is often 20-40% of net worth; Deposits, LIC, PPF, EPF and debt funds is usually 40-50%).
But if you have a very high equity allocation, and you are feeling uncomfortable, this may be a time to question that high allocation to equity.
If you have money to invest now, decide on an asset allocation based on your goals.
At Scripbox we have always advocated an asset allocation based approach : Invest in equity for the long term and for the short term, park your money in liquid and low duration funds.
P.S.: As an investment service, we usually only talk about economic impact but in the current scenario, personal impact is likely to be higher – impact on jobs, spending power, physical & emotional well-being in case the coronavirus outbreak gets worse.
At this point, the health of your family, and you, comes first. Stay safe.