May 13, 2020
After a year of subdued growth, as the markets finally looked to be turning at the start of the year – BAM! Investors’ sentiments were hit by US-Iran tensions, a domestic budget below expectations, Covid-19 scare and crashing oil prices.
The sudden and several hits in a short time led to an overall risk-off sentiment among investors sparking a global sell-off, without much evaluating specific impact on sectors or even countries (Eg. Crashing oil prices are net beneficial to India and can potentially save us net 1.5-2L crore! Yet markets fell on the news of sharp fall in oil prices). Principles of investing have taught us time and again – markets in short term are driven by sentiments and in the long term by fundamentals.
Even as investors grapple to come to terms with a steep 20%+ correction in Nifty since peak in Jan 20 and thereafter an almost see-saw bounce back of ~15% in a single session yesterday, we look at advice from people with experience in manoeuvring through such testing times – and in the words of Warren Buffet, we highlight our stance – “Be greedy when others are fearful and Invest for long term.”
While we are not health experts and recognize this as a health crisis, not a financial one; we look at history for some logical extrapolation on how this might pan out. Attached image highlights how markets have moved during previous health outbreaks and emerged stronger.
Further, we seek some comfort from how countries globally have been swift to react – both from public health policy as well as financial policy response. Lockdowns and isolation facilities have shown positive results in China with fresh cases decelerating sharply, with similar actions being taken by others now. While on the economic front, 33 countries’ central banks have cut rates and have now started to follow it up with fiscal stimulus.
We reiterate that sticking to one’s asset allocation is the best course of action in such highly uncertain times. Even as markets price in the downside of Covid-19 crisis, they could just as easily swing sharply to the upside if there is a containment of the coronavirus situation. Volatility is short term but visible, however taking impulsive calls by extrapolating such events into long term market direction and moving out of the equity markets only leads to the mistake of converting your notional loss into a permanent loss and moving further away from your desired goal / targets.
Until clarity emerges, we should maintain investing discipline and let the event play out, while being cognizant that this still a health concern requiring us to focus on maintaining social distance, avoiding non-essential travel and frequent hand washing. Stay safe!
