The virus will pass, so will the opportunity
It is not the first time that the markets have seen such a correction, nor will it be the last. The table here highlights the main corrections in the Indian capital markets in the past two decades triggered by global factors and subsequent returns in the next five years. The healthy returns on investments made in these difficult times suggest something very intuitive: The best investments are made at the most difficult times.
Why is this then? This is because in times like these, fear and short-term thinking dominate, markets move from optimism to deep pessimism relatively quickly, leveraged positions unwind, and markets overreact, creating a basis for good returns from the future. It is interesting to note that while the markets have corrected by approximately 30%, the impact of the coronavirus on the economy / corporate earnings will be much less, especially for a year. Therefore, it is reasonable to conclude that the value of the companies has not changed significantly. It is only prices that have been sharply corrected. If prices have fallen but commercial values have not, can the negotiations be very far?
The decline in equities, and even bonds, is primarily due to the FII sell-off. This is probably happening because India is linked to emerging markets (EM), whose economies are highly dependent on exports and / or are net oil exporters. The sharp drop in oil prices will significantly affect several net oil-exporting MS, such as Saudi Arabia and Russia. Export-driven economies such as China, Korea, and Taiwan will also be affected due to a sharp slowdown in consumer discretionary spending globally due to the coronavirus. The impact in these countries is, therefore, real. Due to challenges in other MS countries, deteriorating global growth prospects and sharp correction in equities, it is natural to expect outflows from FII, especially from EM-focused funds. As India has received allocations of EM funds, it has also seen significant outflows. This has clearly affected the Indian equity and bond markets. The only thing about India is that you can really win in this environment. This is because exports are a relatively small portion of our economy, and the sharp drop in oil prices is very positive for India.
The disruption in the global supply chain due to challenges in China has highlighted the risks of overdependence in a single country. Therefore, many global multinationals are likely to consider diversifying their manufacturing operations outside of China with a sense of urgency. India is likely to emerge as a key beneficiary due to its lower costs, large pool of skilled labor, large domestic market, improved business environment, 15% concessional tax rate for new manufacturing units , etc. The environment hurts most of the MS, India actually has medium-term gains. Therefore, the deep correction in Indian stocks is an opportunity that investors should not miss. In fact, similar corrections in the past, i.e. 2001 and 2008, which were the result of challenges outside India, provided good opportunities for those who could look beyond the noise.
However, it will be naive to conclude that there will be no impact of Covid-19 on the Indian economy. The impact on consumption, discretionary and even non-discretionary, although to a lesser extent, will be felt for some time. Given that India is a service-driven economy, and given the impact on airlines, retail, travel, tourism, etc., there should be an impact on wages, especially for low-income groups. This could lead to a slightly longer effect on consumption. But since the weight of these sectors in the Nifty50 is limited, the impact on broader markets should be limited.
Large banks should not be seriously affected: credit growth was in any case low and maximum NPAs and provisioning costs have lagged behind. Furthermore, the environment supports large banks that have the dominant weight under finance at Nifty50. In addition, capital spending, utilities, oil refining and marketing, and the pharmaceutical industry should have low impact for a full year. You may feel some impact from travel restrictions, economic slowdown, etc. Although it benefits from a lower rupee and higher offshoring. Thus, most sectors are likely to be minimally affected at least over time, but their share prices have also fallen along with other stocks.
What should investors do? The current volatility is a reminder of the real nature of the stocks: unpredictable, risky, difficult to forecast, and prone to surprise, especially in the short term. This is also a reminder of some time-tested rules investors should follow: 1) Invest only venture capital in equities, i.e. the portion of wealth that can be saved for 3-5 years or more and in the that tolerated volatility can be generated, both emotionally and financially. 2) Never borrow and invest, avoid futures and options (except for coverage). 3) Maintain diversified portfolios of direct stocks or invest in mutual funds.
Those who have observed these rules should be able to see through these difficult times. Ideally, where risk appetite allows, investors should go one step further and use this deep correction to their advantage by increasing exposure to equity / equity funds. At times like this, only the perceived risk is higher, not the actual risk. It would also be wise to invest in 2-3 phases over the next few weeks or months.
A significant stretch should now unfold because the markets are down 30% and there is a high probability that as we gain control of this things will return to normal. The other party should be kept on hold for now, in case the situation worsens, and should be reversed in any way for a few weeks or months.
An interesting learning from markets over the past 3-4 cycles over three decades is that market leadership has changed only in recessions. Old economy to IT in 1992, IT to old economy in 2000, infra and others to FMCG, pharmaceutical in 2008: all these transitions took place in market recessions. Will this correction also result in a change of leadership in actions?
Only time will tell, but I think it is more likely than not, as years of underperforming stock prices, despite reasonable business performance in sectors such as utilities, pharmaceuticals, oil and gas, capital spending and large corporate banks have created good results. value. So direct investors need to be careful when buying stocks that have dropped sharply after years of strong returns because if there really is a turnaround then what worked in the past may not work and what did not work so far finally Can work.
In conclusion, the clue to the smart investor is hidden in the crown itself: Kyo Rona? Invest Karo Na. As Sir John Templeton rightly said: “It is impossible to produce superior performance unless you do something different from most.”
(The writer is CIO, HDFC Asset Management Company. Opinions expressed here are from March 23. Opinions are based on internal data, publicly available information and other sources that are believed to be reliable but involve uncertainties that could cause actual events to differ materially from those expressed or implied by such statements. The stocks / sectors mentioned above are illustrative and are not recommended by HDFC Mutual Fund / AMC. The Fund may or may not have present or future positions in these sectors. The foregoing should not be construed as an investment advice or an investigative report or recommendation by HDFC Mutual Fund / HDFC AMC to buy or sell shares or any other collateral covered by the respective sector (s). In view of individual circumstances and risk profile, each investor is advised to consult their professional advisor before making decisions regarding investments in securities. HDFC Mutual Fund / AMC does not guarantee any return on investments made in the Schemes. Past performance may or may not be sustained in the future. Neither HDFC AMC nor HDFC Mutual Fund nor any person related to them accept any responsibility derived from the use of this information. Mutual fund investments are subject to market risk, read all documents related to the scheme carefully)