A Leap of Faith – In the Test of Time

‘Covid.19,’ has triggered a crisis of mammoth proportion. It has given a smashing impact on the lives and livelihoods, with economies around the globe reeling under turmoil, facing collateral damages of every nature, much worse and fearful than that of financial crisis of 2008. Lurking danger of global recession is looming large.

The prices of even ‘True Blue’ stocks across industries, around the world have been battered black and blue. Global markets have shed around US $15 trillion of wealth. Stock indices of prominence have faced up to 30% fall; situation of Indian Indices have been no different- Dalal Street witnessed the blood bath more than once since March 2020, upcoming Burger King India- withdrawing their Initial Public Offerings and SBI Cards -saw listless listings.

We are in the firm grip of bears; for next 12 month for sure! New York Stock Exchange opened without its trading floor for the first time in 228 years on March 23^rd, after two people tested positive for Covid-19 on the trading floor. The fierce pace and extremity of correction has panicked investors, leading to the loss of confidence in the markets that could not be revived despite multiple rate cuts by the Federal Reserve. Countries are staring at sharp cuts in their GDP growth forecasts, with loss of millions of jobs in vogue.

However, times like these offer investors a rare opportunity to invest in assets at very attractive prices. As for the economies, they would defy all precedents and emerge stronger to deal with such ‘black swan’ events in the future.

The market volatility can be worrisome in the short term, but long-term investors need not develop cold feet. Global and Indian equity markets had rallied out of proportion, which is now getting corrected due to Covid-19 pandemic. However, going by the experiences of past out-break of viruses like Swine Flu and Zika, we have seen that such epidemics are temporary phenomena and when they are over, markets see unprecedented rise. Expect markets to gain traction once COVID.19 crisis is over.

Markets are cyclic; one should use this slump as an opportunity to invest for 36 month, in front-line stocks, which are fundamentally strong. We know for the fact that, quality companies will create wealth, as they have enough resilience to bounce back after a sharp decline.

However, it would be good to stay away from direct stock investing; if you don’t have grip on the subject and access to high grade research reports. Instead one can take Mutual Fund route for investing. Certain AAA rated Corporate FDs can also offer good options if one is comfortable with fixed rate of returns. Besides, get your selves sufficiently covered with adequate health and life insurance.

Market volatility helps build wealth over a period of time. Therefore, investors should continue disciplined investing through systematic investment plans (SIPs) and stick to their asset allocation. Those who have surplus money should invest more.  However, do not make the mistake of buying low priced stocks or cyclical stocks.

The major impact is expected to be on Hardware business, the Software and Services businesses are also expected to slow down. However, adoption of collaborative applications, security solutions, Big Data and AI are set to increase in the times ahead. IT solution providers should test run some concepts like enabling –‘work from any place, any time’, as they may have embedded business opportunities for the future.

In the long run, when things are under control, markets would recover and the same businesses would be fairly priced again. If we consider everyday utilities, despite a slowdown we would continue to consume toothpaste, soaps, tea and other grocery items. This is exactly where companies like Hindustan Unilever, D’Mart and Colgate come into the picture since, they would continue to create wealth as they have been in the past.  So, investing in the stocks of good I.T, FMCG, Pharma, Insurance companies can be a sensible decision.

India’s already decelerating economy is now staring at disruption as the country is locked down, though government of India and the RBI have taken slew of measures to combat COVID-19 impact.

India’s services sector comprising of retail, aviation and entertainment, have been severely hit. The manufacturing sector is also suffering, casting serious concerns about the medium term viability of many businesses, including the MSMEs. The infrastructure sector is also in turmoil. Fear is that these developments may lead leveraged companies to default and create non-performing assets. The current situation has also led to significant volatility in asset prices, especially for financial assets including publicly traded debt and equity.

In the current situation companies should assess cash balances to meet operational expenses, reassess business strategies in light of post-COVID scenario, necessary adjustments to the capital structure factoring in lower earnings, and diversify funding sources.

The current situation would leave deep impact on the economy due to it’s high intensity and long duration. It may alter the business landscape through changing trade flows, asset prices and consumption patterns, impacting all stake holders. The need of the hour is to put in place a robust action plan that addresses potential impact, from short-term cash flow concerns to longer term adjustments of financial statements. 

At the level of nation, the void created by disruption in global supplies can be filled by India. Global supply chain network has totally collapsed. The worst-hit sectors include technology and auto. China is a major exporter, creating significant reliance on them, is hurting the global economy and manufacturing of many companies have almost halted.

The movement of companies from China to other nations should be lapped up by India – which is in quest of FDI. The expansion of the manufacturing hub linked with global supply chains would create large-scale employment.

The outbreak of corona virus provides a sizeable opportunity for India to follow an export-driven model. However, necessary tools, pool of skilled labor, network of suppliers, easing the logistics process, better business environment, doing away with administrative bottlenecks, more incentives, robust infrastructure-power, efficient port and roads would be the ask to redeem the opportunities.

Time is the best healer. We don't know if this crisis is going to get worse, and we never know whether the panic is going to be the once-in-a-generation kind, but if we were to take a leap of faith looking at how China has recovered; we know that, we shall stand test of the time to emerge as winner.