Portfolio

Coronavirus close home: As the markets swoon, what should investors do?

Lokeshwarri SK BL Research Bureau | Updated on March 05, 2020 Published on March 04, 2020

Investors can bargain-hunt for blue-chips and continue with their mutual fund SIPs

Nervousness returned to Indian stock markets on Wednesday, with the Sensex and the Nifty 50 turning extremely volatile, as the number of people who have tested positive for the coronavirus infection in the country rose to 28. With social media in a flutter over the dos and don’ts to ward off the outbreak, panic is beginning to spread across the country and this was reflected in the sharp swings in the stock market.

The Federal Reserve’s 50 bps cut in Fed Fund rate, along with statements from the IMF and central banks about supporting their economies if the need arose, seems to have increased the nervousness among investors.

It is difficult at this stage to gauge the impact of the Covid-19 on global growth or on individual economies. The good news is that in China, where the virus allegedly originated, the number of new cases being reported is reducing. But, with 93,574 cases and 3,204 fatalities in 81 countries, it is not surprising that there is growing concern across the globe.

A fortnight ago, concerns mainly centred around slowing growth in China and disruptions in supplies from the country. But now, there are worries about production and services shutdown in other countries as well, as people are told to restrict movement, to contain the infection.

Equity markets swoon

Equity markets in developed countries were relatively sanguine about Covid-19 until recently, when they were confident that the virus could be contained within China and a few other countries such as South Korea and Singapore. It is only when the numbers reported from Italy and other European nations and the US began growing, that panic spread.

The Sensex and the Nifty 50 have lost around 7 per cent since February 20, 2020. But developed market benchmarks such as the FTSE 100, CAC 40, DAX and Nikkei have lost between 9 and 12 per cent over the last couple of weeks.

Why the sudden selling?

We have been reiterating that the rally in equity markets in the US, Europe and to some extent in India, too, has been fuelled by global central bank policies. Due to consecutive rate cuts, policy rates in countries including Japan, Switzerland, Sweden and Germany had moved below zero. This cheap money, couple with continued quantitative easing by central banks including the ECB and the Fed had resulted in excessive liquidity in global markets, a large part of which has been used to finance global stock market trades.

This cheap money has been keeping stock prices in developed countries elevated even as the underlying fundamentals have been quite weak. In India, too, FPIs brought in $14.3 billion in 2019, helping the Nifty 50 and Sensex hit new peaks even as the economy skidded and earnings growth faltered. The sudden sharp decline in global equity markets in the last week of February will put pressure on positions built through currency carry trades (borrowing in currency with low interest rates to invest in assets across the globe) since repaying these loans becomes difficult as prices collapse.

But with central banks making it clear that they will keep the liquidity faucet open to support asset prices, stock prices could attempt to recover. But the speed with which the epidemic is contained in all countries remains the key to halting this decline.

Valuations correct

Investors need to take note of the fact that the ongoing correction is a blessing in disguise. The valuation of frontline indices has moved down over the last fortnight, making them more attractive.

While the Nifty50 was trading at a price earning multiple of 23.6 times, its trailing 12-month earning on February 20, the PE declined to 21.8 times on Wednesday. The index is also currently trading below its three-year average PE of 23.6 times. The PE ratio of the Sensex has also moved lower, from 25.2 times to 23.3 times.

 

 

Surprisingly, the cut in mid- and small-cap indices has been on par with the large-cap indices in India. This could be due to larger institutional investors leading the selling. The BSE mid-cap index has declined 7.9 per cent since February 20, while the small-cap index has declined 8.8 per cent.

Sectoral indices that have taken a severe knock in the decline since February 20 are CNX Media index (down 13.9 per cent), BSE realty index (down 9.4 per cent), BSE metals index (down 12.8 per cent), oil &gas index (down 9.5 per cent) and BSE auto index (down 10.9 per cent).

What should investors do?

The ongoing correction should be viewed as an opportunity by long-term investors to pick their favourite blue-chips at attractive prices. The accompanying table shows that in the Nifty50 basket, many stocks have already declined more than 10 per cent since February 20. The PE multiple of many of these stocks such as Hindalco, Tata Steel, SBI, Bajaj Finance and Reliance Industries has corrected over 10 per cent. Investors who invest directly can look for buying opportunity in these blue-chips.

While many stocks that have corrected have short-term headwinds, investors need to keep the long-term prospects of these companies in mind while evaluating them.

 

 

It may be a little too soon to start looking at mid- and small-cap stocks. Many of these stocks have already rallied over the past few months and smaller stocks take much longer to recover when the market corrections become deep.

Investors who prefer the mutual fund route should not stop their SIPs in such times. The price decline provides an opportunity to buy funds at lower values, thus averaging the overall cost of your holdings.

As far as making lump-sum investments, either in mutual funds or direct stocks goes, that is not advisable. For, no one is really smart enough to predict the exact bottom for the market. It also needs to be remembered that the Nifty50 and the Sensex have declined just 10 per cent from their recent peaks. Bear markets call for a decline of over 20 per cent and, in 2008, the Sensex lost 66 per cent from its peak.

While it is possible that the indices will revive soon, it may be best to stagger your lump-sum investments. The positives for Indian equity investors at this juncture are declining crude prices, lower interest rates dues to the RBI’s rate cuts over the past year, a good rabi season and high chances of economic growth reviving from the second half of 2020, backed by government spending and improving consumption.

Fixed income investors

With the Fed cutting rate aggressively, India’s 10-year bond yield declined to 6.22 per cent on Wednesday in anticipation of a similar cut by the RBI. Given the expectation of further volatility in bond markets, fixed income investors can stick to the debt funds that are following a blend of accrual strategy with short duration play, such as banking and PSU debt funds and corporate bond funds.

With inputs from Dhuraivel Gunasekaran

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Published on March 04, 2020
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