How to select quality stocks for recession-proof portfolio as coronavirus knocks down share markets

Updated: April 13, 2020 2:43:07 PM

The markets have historically faced such situations and more importantly recovered from it, albeit over varying time periods. Equities currently provide a good margin of safety and long term investors would do well to buy into the volatility and ensure to accumulate quality stocks during this period

Share marketIndian stock markets were completely in sync with the global markets. Although we have seen market crashes in previous years, notably in 2008, none had the ferocity of the current market downtrend
  • By Sony Mathews

Indian markets had been under pressure for the last 2 years due to issues ranging from slow corporate earnings to the liquidity crisis after the IL&FS and DHFL fiascos. It was then that coronavirus pandemic hit. The virus spread exponentially faster than expected, throughout the world and especially in the developed markets. The global stock markets also started reacting at the same speed. As the number of worldwide infections went up, economies started barricading themselves. The real economic impact of COVID-19 was felt when lockdowns were announced and domestic businesses’ operations were impacted, if not completely halted.

The central banks of most countries came out proactively with stimulus measures to offset the impact. But this is unlike the financial crisis of 2008, which was tided over with stimulus packages. The true impact of this unprecedented global shutdown is yet to be ascertained, and the fact of the matter is that there is a global recession underway and the recovery will depend on the containment of the virus.

Indian stock markets were completely in sync with the global markets. Although we have seen market crashes in previous years, notably in 2008, none had the ferocity of the current market downtrend. In March, benchmark indices were down by 23% for the month. The 10 biggest stocks, as of Jan 1, 2020, had together lost nearly 30% of their market cap by March, with the exception of FMCG giant HUL. Companies, irrespective of its market cap, were impacted by the lockdown and it reflected in their stock prices. The demand slowdown, supply chain disruption (which is now easing out due to resumption of production in China), trade restrictions etc. will have an impact on domestic manufacturing, services, employment and investment, which will pull down the Indian economy. Almost all sectors are expected to be impacted, except for FMCG and Pharma, which are generally defensive in nature.

This disaster could also help Indian firms in the long term. Not to sound biased, India must take advantage of the new normal in world trade, where countries may focus on new trade practices and also look to diversify away from their dependence on China. This offers an opportunity for the government and companies to take the initiative and ensure best practices and thereby also increase the share of exports.

The markets have historically faced such situations and more importantly recovered from it, albeit over varying time periods. Equities currently provide a good margin of safety and long term investors would do well to buy into the volatility and ensure to accumulate quality stocks during this period. For novice investors, we would advice your equity portfolio to reflect your large-cap stock exposures since these companies are easily researchable and information is available. The mid and small-cap exposure, which is inherently riskier and more difficult to analyze from an individual perspective must be taken care of by your mutual fund / SIP investments. Even for a mutual fund, it’s best to consult an advisor because the difference in returns between the top quartile and bottom quartile is wide.

(Sony Mathews is a senior market strategist at Geojit Financial Services. Views expressed are the author’s own)

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