Coronavirus in India: Current market fall can be a best buying opportunity for investors

Among equities, one can adopt a barbell strategy, i.e., own a mix of high-quality growth stocks at the one end and buy beaten down 'relative value' or 'mean reversion' plays such as Corporate Banks, PSU companies, Pharma and Utilities at the other end.

Coronavirus in India: Current market fall can be a best buying opportunity for investors
 In the current situation, the stock market fall, in the global markets and India, is mainly on account of Fear of the Unknown

The world has suddenly become a different place in the last two months, with Coronavirus or Covid-19 taking a host of nations by storm.

It all started with China, and for some time the rest of the world was looking at China, the most populous nation of the world, with curiosity, at what had suddenly erupted within the region. While China was battling with the fast-spreading virus and the Chinese markets started tanking, other markets (including India) initially distanced themselves from the problem, considering it topical and restricted to China and a few other Asian countries.

Markets in the US, as well as India, were quite resilient for some time. Corporate India seemed to be quick to draw conclusions about how some Indian companies and sectors could benefit from trade and manufacturing orders potentially shifting out of China to other countries, including some to India. Little did anyone anticipate that in a few weeks our country too would need to contend with the virus.
The scenario changed, however, when, totally unanticipated, the virus engulfed the world and WHO declared the Covid-19 as a pandemic, followed by various countries issuing travel bans, emergencies, lockdowns, and other restrictions. Capital markets across the world tanked miserably.

The market fall has been a financial tsunami that has washed away faith and stability in spite of a slew of liquidity injection measures announced by central banks across the world.

The speed with which markets nosedived shook the earth, this intensity has never been witnessed by market participants in the last 3 decades or so. Some likened the current crash to that of 1987, when many young traders who are currently thronging their screens in despair and frustration were not even born.
March 2020 will be recorded in capital market history as an unforgettable month.

A historical perspective
That markets dislike uncertainty is well known and whenever they sense that coming, they shed some weight. Looking back at some of the major stock market corrections in India, most of them were driven by financial market excesses or economic disruptions of some sort, with a prolonged impact on the market sentiment. And along with the global market correction, Indian markets too paid a heavy price on every such occasion.

Until such time, however, markets may continue to be volatile and susceptible to daily news-flow and hypothesis with respect to the pandemic, a stage which possibly traders and arbitrageurs will dominate.
What should Indian investors expect from the markets?
Firstly, take the market fall seriously. Markets are worried due to lack of clarity on the immediate way forward. With efforts around containment rising drastically across the board since the last few days, if the corona situation comes under control soon, we could see the markets retrace some lost territory. Else, we stand the risk of markets slipping into a longer bear phase.
Economic recovery and earnings growth in India are likely to be a bit derailed, as the corona scare has a real impact on economic activities in India - travel, tourism, hotels, manufacturing and services having global dependence and now even the larger corporate sector starting to scale down operations and productivity with work-from-home contingencies triggered.
Moreover, structural issues still persist, although improving on the margin. The financial sector has been rocked by one scandal after another, shaking the confidence of investors as well as lenders. For a sustained economic recovery, it is imperative that credit growth picks up.
Some green-shoots are however visible
The recent fall in oil prices is beneficial overall for India's current account, as we are a net oil-importing country. Even if a settlement is reached among the oil majors, it looks pretty likely that the average oil price for this year will be lower than the previous year. Though one must keep in mind that very low oil prices would also mean a lower global economic growth which could adversely impact India's exports, remittances from overseas as well as FPI flows.
A lower current account deficit and lower imported inflation will provide the necessary legroom to RBI to be more liberal with monetary policy. The RBI is anyway committed to maintaining sufficient liquidity, and given the prospects of a delay in economic recovery, a rate cut in the near-term cannot be ruled out.
Global central banks are fast acting to provide liquidity, through rate cuts, purchase of bonds and now a cut in reserve requirements (China). This should hopefully provide some cushion in the current volatility and reduce panic among investors.
Valuations of Indian companies were on the higher side for quite some time, given (a) lack of earnings growth and (b) flight to quality large caps, making a part of the market quite expensive. The recent fall seems to have corrected valuations of several companies, presenting an attractive entry point for long term investors.
And unlike in the previous market falls, the earnings cycle of Indian companies (prior to the Corona shock) was on a path to recovery and not peaking out. The current re-rating of the market is factoring in the possibility of some growth being shaved off owing to the virus effect; but post that, markets will look for growth starting to recover towards the second half of the coming financial year.
Investment strategy
While investors should be cautious to prepare for the long haul, not to rush in (should things worsen from here), a 'buy on dip' strategy may be suggested, given that valuations are far more reasonable now than a month back. Investors should stay within the discipline of their asset allocation and use the market falls for portfolio rebalancing. Any excessive leveraging is best avoided in such times.
If we look back into history, we find anecdotal evidence to suggest that very sharp market falls do present an attractive opportunity for long-term investors to accumulate equities in their portfolios, provided they are willing to extend their investment horizon and ride out the intermittent volatility.

Nifty fell by more than 8% on 12 March 2020, depicting the panic and fear on the street. As seen from the table, barring a few exceptions, such sharp falls of the Nifty (6% or more in a single day) in history have usually been followed by a meaningful return over 1 to 3 years.
Among equities, one can adopt a barbell strategy, i.e., own a mix of high-quality growth stocks at the one end and buy beaten down 'relative value' or 'mean reversion' plays such as Corporate Banks, PSU companies, Pharma and Utilities at the other end.
Among mutual funds, allocation to large-cap and multi-cap funds in the current fall is a better approach and later adding mid-cap funds once the volatility reduces.
A prudent strategy would also be to use a combination of index funds or ETFs + aggressive hybrid funds and balanced advantage funds (which have partial hedge).
In fixed income, given the overall fiscal pressures as well as the fact that long-dated government securities have already rallied quite a bit, investors may explore high quality (predominantly AAA-oriented) short-to-moderate duration strategies, which will serve as a safety play (in the midst of credit concerns) + provide some scope for capital appreciation should the RBI use its monetary tools to bring down rates further at the shorter end of the yield curve.

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