As I write this blog, worldwide the impact of virus on human life is increasing with every passing day. The latest published statistics by WHO states that there are around 800K confirmed lives that have been infected with the virus and ~40K deaths. There are bouts of positive news are also making the news > pointing towards potential cures / vaccines being developed. How much do they effectively translate into, only time will tell…
This saga though does confirm one thing with immense clarity. There is no other uncertainty as big as compared to the risk posed human life. When such risks loom around, it can result in fast tracking all possible decisions on planet earth. Unthinkables do happen. We couldn’t have thought in the past that the entire globe could ever be put under a lock down. People can’t move outside their homes resulting in the stalling of economic cog-wheel. There is a lot of publication out on the World Wide Web and the Whatsapp Academic University on the scale of damage being caused to human lives and the economies. Dooms day scenarios are being rapidly published by various media channels, accentuated by rapid sharing across social media platforms.
What else is happening ‘minus the Virus’
Before I start this section, I would like to narrate a few lines from the book ‘The Behavioural Investor’. The book talks about how emotions can be an enemy of a great investing journey. A study was performed by the researchers of Stanford University titled ‘Investment Behaviour and the Negative Side of Emotion’. The researchers got two groups of 15 individuals each. First group had individuals who were ‘Neurotypical’ i.e. having a typical intellectual and cognitive capabilities. Other group had 15 individuals who were suffering from brain damage to their emotional processing centre. Each of the two groups was given a gambling game. The result of the study was that the brain damaged individuals had better outcomes. For the neurotypical participants, as the risks increased in the game, they became more averse and played more safe bets, resulting in poor performance. On the contrary, the brain damaged individuals were able to fare better as they maintained their consistent style and weren’t impacted ‘emotionally’ on loosing in specific bets. The paragraph ends up on a humorous note that to get richer, a lobotomy can help J
The reason why I started with the above para was to help digest the following points which may be better appreciated if the emotions toward the Virus are curbed for the time you go through the points:
Oil around USD 20 per barrel
Every one dollar drop in oil results in an annualised saving of Rs. 10K crore. From Feb 2020, oil has dropped by around $30, translating into an annualised saving of Rs. 300K crore. Yes there are individuals who are saying that this saving is not passed on to people, but irrespective > this is in the coffers of India. All the dole outs which are needed in these unforeseen times will need to be funded, either today or tomorrow via taxes. In case of India, there is a windfall of oil prices which is going to share a material portion of this cost.
Low Interest Rates
RBI is on excessive interest rate cut spree. We got a RBI bazooka last week whereby Repo rate has now been reduced to 4.40%. I do not recollect if this rate was ever lower than this. Repo rate is the rate at which RBI lends money to the banks in India. In simple terms, the lower it is, the lower should be the interest rates in the country. It is worth-while to consider that the lower interest rate results in lowering the cost of borrowing for consumers as well as businesses. This has a knock on positive impact on the cost of production and increasing demand. Yes there is a negative impact on savers too whose primary source of income is via fixed interest returns.
Diversification of Global Manufacturing Hubs
The impact of Make in India may now perhaps get materialised. The board members of all great Companies will now need to reconsider the locations where their manufacturing facilities are hosted. Too much concentration in one country has bitten most of the Companies badly. They may be doing this exercise earlier as well, but earlier the scale of such a disruption would have been considered a ‘improbable’ and hence any such discussions would have been pushed under the carpet. Perhaps, India is now back in the race. Yes, there would be a lot of further measures needed to lure such Companies, but things look positive.
Tremendous Liquidity in Global Markets
Central banks across the world are pitching with an unprecedented rate cuts and liquidity injections in their respective economies. This is indeed the requirement of the hour. The efforts range from zero interest rates, easy loans, free dole outs, etc. Let us fast forward this scene a few months / quarters from now. Imagine what would the investment managers do with this free money at their disposals? Sooner or later, it will end up getting channelized towards stock markets and then rest is history.
Valuations at Low Levels
You may have heard it in many print journals > Always buy Quality Companies at a price. But when does Quality come at a bargain price? The answer is, when there is widespread fear and panic. And why people miss on buying the Quality franchises at a good price? The answer is > emotional restrains to stay close to cash when there is widespread gloom and doom all around. Clearly one needs to be reasonable in their approach by aligning their funds with the goals. Factually, you can refer to the graph and see that just within a month, the valuation of Indian Markets have come down from around 28 PE levels to 18 PE levels. That is a substantial correction in prices being paid for stock markets.
Demand Destruction vs Deferment
Post the lock down gets lifted, the first challenge for the business houses would be to gather their work force which may have gone back to their home towns / villages. Once the shops are ready to serve, you may appreciate that there won’t be a lack of business. Demand should be back gradually and then with a vengeance. All the people who are currently locked within their homes with all travel plans curbed > easy to guess >>> will start being globe trotters again. Yes there will be initial concerns not to get in touch with the viral infection, but that inhibition too shall pass within a few months. How about the demand which was on the cards, but deferred? Examples include buying of cars, phones, homes, painting of homes to construction jobs, all which were left stalled. One should be rest assured that this too shall be back with speed. Any idle capacity should hence be working on close to full capacity post normalisation. It is likely that in the remaining part of the year, the businesses should be able to pickup substantial amount of lost sales.
It will be naive of me to underscore the severity and possible consequences of the Virus. But the objective side of me says that this too should pass. And if this too should pass, why should I leave this once in a decade of investment opportunity. Yes, I should follow all the right steps of curating an investment portfolio and sticking to my asset allocation (though at this time I am a bit tempted to be skewed towards Equities for a short period of time for my incremental investments).
I would like to conclude by quoting what I read on my Twitter feed. It said.. If you are alive by the end of 60 days, you will really regret missing the Equity Opportunity which is infront of us now. If you want to read what we are doing an a few Do’s and Don’ts, you may read our post COVID-19 – Impact on Your Personal Finance
Stay safe & stay indoors till this Virus passes away.