Market Sense — 045 — (March 2020)
The Month Gone by?
On Thursday, March 12th, 2020 Indian markets woke up to the WHO declaring Covid-19 a pandemic, and the markets fell with the Sensex shedding a massive 2900 points, the worst fall in the lifetime of the indices. Strangely just two months back on the 14th of January, 2020 the Indian stock indices hit their life time highs of 12362 and 41953 respectively. By end of the month we are back to where we were 6 years back
Indian Markets were just mirroring the Global Markets. All the US Indices peaked on February 12, 2020. On March 9 the NYSE fell 1800 points on a single day, the worst ever. During the period 24 to 28 February, markets reported their largest one-week declines since the 2008 financial crisis. Global Stock Markets entered BEAR Territory.
Why the swift crash in stock markets ?
The difference between the current crash and previous one is the swiftness and sharpness of the fall. The key concern this time is that the reasons for the fall are not economic, but Medical Issue a clear unknown animal. As the pandemic spread faster and affected more people the markets continued to fall. As on end of March over a million people are infected with over 50000 deaths mostly in the developed world.
The lockdown announced by several countries is expected to impact the GDP of most of the countries and unemployment rates is expected to increase. International Monetary Fund (IMF) chief Kristalina Georgieva on 27 March said the world has clearly entered a recession. The economic situation is expected to be very bleak for the next 6–9 months.
The several reasons for the swift and sharp fall in the Indian market are the foreign money moving back to their home markets, redemption pressure on hedge funds and ETFs, margin calls, deleveraging and overall Risk Aversion amongst investors. The excesses built up by ultra-loose monetary policy over the last few years are now being unwound. The economic impact of the virus will lead to cuts in earnings. There is a serious fear that the epidemic will morph into a financial crisis.
There is a serious pressure on the health care system and with no cure in sight the situation is becoming worse each day. The stench of fear was everywhere and the price action suggested forced liquidation.
Reaction of Governments to Crisis ?
I shall focus on the actions taken to prevent a financial crisis and fight the expected recession. Most of the Central Banks reduced interest rates and increased liquidity apart from direct cash transfers to people at large. The US Fed reduced the interest rates to almost ZERO, and the US Government announced a USD 2 Trillion stimulus.
PM Modi announced a country wide lockdown for 21 days till April 15 to slow down & prevent the spread of the epidemic. Government has also created a few special groups to focus on various actions such as medical facilities, equipment, PPE, Training etc., on a war footing basis. Massive sanitation drives are underway at all cities and villages across the nation.
RBI announced a slew of measures to support the banks and finance companies. Focus being on reducing the stress in the credit markets. Interest rates were dropped and CRR reduced. A 3 Month moratorium was announced for all loans. Government announced various welfare measures including cash transfers to the poor, senior citizens and farmers.
Time to be Greedy?
Growing investor fears over the coronavirus epidemic and its long-term economic implications are translating into a massive selling in equities. Uncertainty has gripped the entire world. Suddenly Greed seems to have been replaced with Fear.
To put matters in perspective, despite wars, recessions and market setbacks, stock prices generally reach successively higher levels over long periods. This time also it is not going to be very much different.
It is the time to be greedy. Time to pick up great companies at bargain prices. There is a fire sale of stocks at Dalal Street literally. Companies run by efficient and great managements shall surely bounce back in another 3–6 months.
The demand and supply shocks from the lockdown will only be temporary. In time, life will return to pre-Covid-19 levels and business will run as usual — people will shop, flights will fly, trucks will move and factories will run. To believe otherwise is to disregard history and good sense.
Nifty P/E was at a high of ~28 through December 2019. Now it stands corrected at around 15 or less on a forward basis. This simply means that stock prices are at mouth-watering valuations. Many good quality stocks have fallen to valuations never seen in the last 10 years. Over the past couple of months the markets were disconnected from the pains of the economic slowdown and continued to rally? The crash has brought in sanity to the markets.
These are those rare occasions when one can go out and buy stocks by the truck loads. There is every possibility that the markets shall be volatile and can even fall further in the near term. Hence it is better to stagger investments over the next 3–6 months.
Time to buy good quality stocks or Equity Diversified Mutual Funds SIP by SIP.
Happy Investing……………