Making investment sense of Covid-19 led correction

For my generation, Covid-19 is a name which will be most likely be etched into our memories. Not because of the deaths but due to the amount of panic it has created all around the world. Compared to it, previous pandemics like SAARS or Ebola pale in comparison though they were more deadly. This is not the first time, we have faced a pandemic. Last, I recall such fear in India was during 1994 when plague hit India. It started in Surat as the news spread on the night of 21 Sep 1994 and caused immediate panic. Ill-prepared medical shops & hospitals quickly ran out of tetracycline (antidote). A quarter of Surat’s population left the city which was India’s largest human migration after independence era. This helped to spread the virus to five other states. While panic lasted for roughly a month, rumors & lack of coordination between various Government agencies made the matter worse. In the end, 50 people lost lives & around 700 people were infected. Many international flights were cancelled, export businesses took a major hit. Remember there was no smartphones back then.

Today, as India prepares to fight this battle, smartphones are actually helping to spread the awareness in a timely manner but not without a healthy dose of rumors along with it. The result is pure panic which in a way is good as it helps to reduce the spread of this virus but bad for economy.

Coming to stock market, as you know market is very sensitive to any panic reaction. With so much panic around Covid-19, the correction seems justified purely on the basis of market emotions. Foreign investors are pulling out while domestic money is seeking safe heavens like gold and deposits. Earlier, China was the epicenter of this pandemic but focus has now shifted to Europe. Overall, global economy may plunge this year into a recession. There is no exact way to find out how much will be the impact. Things will get clear only after 4-6 months.

As per WHO, the impact may last for another year. In all probabilities, 2020 is going to be a another wash out for equities and investor should get mentally prepared to face it. At the same time, this is not the time to exit equities. If you want to get rid of equities, do so during next bull run & not during current bear run. For investor who understand that time horizon for equities remains at least 5-6 years, must remain committed to their strategy. Based on historic performance, there are very less chances of negative return (around 1%) over any consecutive 5-6 years period. If you expand it by another year, i.e. 7-8 years, equities will likely beat FD rates as well. The average returns for long term (more than 5-6 years) stands at around 15%. This based on sensex return analysis since 1980.

Sensex continues to move up despite challenges

During last 40 years, there have been many pandemics, SARS, MERS, EBOLA. Many financial crisis – 2008: American Banking Collapse, 1998: Asian Banking Crisis. Many Government changes – Clinton to Bush to Obama. Congress to UPA to NDA to BJP. Many natural disasters – Indian Ocean Tsunami, Fukushima Earthquake, Wild Fires in California & Australia. Despite all this, equities have remained top wealth generation asset class over long term. So why will it change now? People may say this time it is different but actually it is never different. If you look at history, you will realize that as human species follow same patterns over the years. Only the form keeps changing but underlying reasons are driven by the same range of emotions like Greed/Fear/Revenge/Compassion etc.

In current scenario, we are entering third year of bear run. On paper, it may look like bull run has just ended as Sensex kept rocking over last two years but at boarder level it has already been two years of bear run. With Covid-19, another year will be added to the tally. Making it three years of bear run. Now in next two years 2021 & 2022, we are bound to see a big rally else last 40 years data stands null & void. Having said that history can only be used to speculate & it never guarantees a future outcome. There is always a possibility of new record creation but even if it happens, bull market will always be round the corner. Add or delete another year or so.

Imagine a catapult (गुलेल), the more it stretches the greater is sling speed. In the same manner if we witness more correction in equities, the rebound is going to be even higher. In the picture above, you can see that markets have eventually recovered every time they went down. In previous picture, you can see that despite such corrections, the market continues to go up. If Sensex is today at 29k, a 100% jump from here in next 3-4 years will take it to 60k. Keep this facts in mind, whenever bears troubles you. Of course, patient capital is need to make money in equities, you should only invest what you can afford to be locked-in for next 5-7 years.

Covid-19 may have different implication for different investors. Basically, if you are good 10 years away from your goal, this is a golden opportunity. For investor who were looking to redeem now, this is really terrible. They should explore options to defer redemption for at least 2 years. This also serves as a reminder for other investors. Everyone should start to redeem good 3-4 years before end of their investment/goal tenure and follow asset allocation to safeguard in case of such black swan event occurs.

Young InvestorExcellent time to invest more. This is a blessing in disguise. Since their goal is easily 15-20 years away, they should use once in a decade opportunity.
Middle-Aged InvestorCarefully invest more. Your goal should be more than 5-7 years if you plan to do so.
Retired InvestorThis is very bad for retired investors who rely on equities for their expenses. They should defer redemption for an year. Later, they need to follow asset allocation and keep next 3-5 years of expenses in form of deposits.

In summary, below are our remarks to tackle current situation

  • Follow social hygiene & verified information
  • Check your health & life insurance coverage. If you still don’t have a health insurance, buy it immediately for yourself & your dependents. Buy term life insurance for yourself.
  • For investment, do not rush to invest more in one shot. Market will remain under check for atleast 4-8 months. You will get ample opportunities to buy in a monthly fashion. Use your salaries to add investment. Do not dip into emergency funds or loans.
  • Have patience. You have endured for long time. Now is not the time to throw it away.
  • This phase will also pass with time. It is not end of the world. Economy will not remain in a lock-down forever.
  • Invest for long term only. Avoid trading or leverage.
  • If you are looking to redeem after good 6 or 10 years, why bother daily market reaction.

We hope this soothes some of your investment concerns, feel free to write back to us or add comments. We can be reachable over whatsapp +919958092336