Global markets have corrected by 30-40%, crude price has halved (reaching near 20 year low) and the world is facing a global pandemic not seen in 100 years.
- By Pankaj Tibrewal
Vladimir Lenin once said, “There are decades when nothing happens and there are weeks when decades happen.” The above phrase seems apt in the current environment. Global markets have corrected by 30-40%, crude price has halved (reaching near 20 year low) and the world is facing a global pandemic not seen in 100 years. What a month, phew! The key question now for us as investors is whether right now it is a good time to invest and what are the key monitor-ables? In our view there are three key monitor-ables which would give us some clarity on when are the equity markets bottoming.
We find a cure for the virus or pace of spread of Virus slows down
Given that the genesis of the current crisis is the spread of the pandemic, the solution or the market bottom will also be found, once the virus spread eases or a vaccine is found. In the near term, a medical cure looks difficult. Hence, the pace of spread of virus becomes critical. China and South Korea have shown that lockdowns are effective in curtailing the spread of virus, although they come with very adverse short term economic shock. Even in Italy the daily new cases are stabilizing around 5-6k, and lockdowns are being effective in curbing the pace of increase. Hence, to that extent the new cases should peak out sooner rather than later. In India, given the governments’ proactive measure of implementing lockdown and relatively warmer temperatures, virus spread could probably be curtailed even sooner. The challenge is in the US, which seems to be 10 days behind Italy and the cases there continue to rise at a very sharp pace. Hence, to that extent the pace of virus spread in the US remains critical going forward.
Global policy response: The size of the fiscal and monetary stimulus announced is large enough to underwrite the economy for at least 6mths.
While the virus is wrecking economic activity and causing health hazards, we should not close an eye on the synchronous policy response that is now starting to come through. Globally central banks have committed to unprecedented amounts of stimulus (more than 5 trillion USD). Infact, in the last two weeks itself the US Fed has expanded its balance sheet by more than 1 trillion USD – a magnitude by which it expanded during the entire Lehman crisis. It is expanding its balance sheet by an unprecedented pace.
Also, importantly this time around we have fiscal authorities also in the game with US Congress and Germany passing stimulus exceeding 10% of their GDP (much higher than what was passed during the Lehman crisis). Debates about helicopter money (central bank printing money and transferring it directly to households) have gained vigor in policy circles. This will address the income inequality prevailing globally and will lay down a path of sustained economic growth once the virus subsides. Once the issues subsidies, we are pretty sure that the companies and investors who would survive would be disproportionately rewarded as there would be huge liquidity globally chasing limited and quality stocks.
In a nutshell, policymakers this time around are far more proactive than any time in the past. In the last two weeks more measures have been implemented than that during two months of financial crisis. There is an old adage which goes, “Don’t fight the Fed”.
Valuations become too cheap to ignore and markets can ride the uncertainty of the virus in near term.
From a valuation standpoint as well, the recent market correction has made valuations very attractive. India’s market cap to GDP is now below 50% and historically, we have observed that markets typically tend to form a bottom around these levels. Even from a Price to book perspective, India is now trading close to 1.7x, a historical bottom. Around turning points, P/B is a much better valuation indicator than price to earnings as it values a stock based on intrinsic asset value rather than a year’s earnings (which could be depressed in the current scenario). Also with oil prices coming down, India stands to gain in terms of current account and fiscal side (benefit of USD 50b assuming current oil prices).
Conclusion – Time to start investing in a staggered manner and disciplined in asset allocation.
We acknowledge the fact that near term can remain quite uncertain in terms of duration of pandemic, secondary recurrence, extent of lockdown, and consequent economic fallout but if one has a 3-5 year investment horizon it’s a great time to start investing or increase equity allocation in one’s portfolio in a staggered manner. If someone waits for clarity to emerge he/she would have to pay a higher price. It would be extremely difficult to time the market. Navigating this period requires a belief in the Darwinian motto of flexibility and a necessity to fight the urge to get either unduly bullish or bearish – Nobody knows (including the machines!). Human nature and excel sheet make us extrapolate the immediate past indefinitely into the future. ‘Things are never as good as you think they are or ever as bad as you think they are.’
Every crisis brings new challenges and somehow humans have been able to tide over it. The crises that unfolded in 2001 (9/11 terrorists attacks) and 2008 (Lehmann Bankruptcy) and their effects were similarly overcome. With the benefit of hindsight, we can say those were very good buying opportunities. As Soren Kierkegaard is quoted “Life can only be understood backwards – but it must be lived forwards.” We will survive this crisis as well. Companies with strong balance sheets and business models will come out stronger. Thus, while we are physically locked in, it’s probably time to financially venture out. Stay home, stay safe and observe social distancing but not financial distancing.
- (Pankaj Tibrewal is SVP & Fund Manager (Equity) at Kotak Mahindra Asset Management Company. The views expressed are the author’s own)