Don’t Let Coronavirus Infect Your Portfolio!
Ignore the noise and stick to your target asset allocation. Events will come and go, but fundamentals will prevail in the end.
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Coronavirus – the dreaded bug that emerged in Wuhan a couple of months ago – has successfully spooked both domestic and international markets; exacerbating the pain investors had already been feeling since equities went into a shell two years back.
Anecdotal evidence suggests that investors – retail and moneyed alike – are making a beeline for the sell button. The underlying fear is amply evidenced by Monday’s sudden and almost jocular last moment tumble when news reports emerged about “one case in Telangana and one in Delhi”. The NIFTY, cruising 200 points above Friday’s close at that stage, plummeted 270 points in a heartbeat! Mutual Funds are feeling the heat of redemption pressure and SIP stoppages too.
While it rings true that the Coronavirus has disrupted the global supply chain, hurt China a great deal, and even pushed growth back by a few months, the fact remains that the “virus” we should be a lot more worried about is that of low earnings growth that has crippled the Indian economy and markets over what some have eloquently dubbed the “lost decade” for Indian earnings growth. The good news, on the other hand, is that a lot of fundamental indicators are signalling that we may be set to emerge from this trough soon. The trailing P/B ratio of the NIFTY index, which was at 6.39 times during the euphoric highs of late 2007, is now at a sober 3.15. The market cap to GDP ratio is 72% today, compared to 149% in 2007. And although the Price to Earnings Ratio is still fairly ripe at 25.5 times, this could change fairly quickly if the structural measures implemented of late start translating to robust earnings growth over the next few quarters. We may even have begun a cautious bull run in September ’19; don’t fail to notice that despite all the tumult, mid and small cap indices are still up nearly 10% from their August ’19 lows, in just about 6 months.
Those who are predicting that the writing is on the wall for China as a global manufacturing hub, are failing to factor in the country’s extraordinary resilience and ambition. The reality, twelve months from now, is quite likely to be different from what the doomsday prophets are predicting. The country can and will recover from this shock and get back on its feet; with a few bruises, of course!
Add that to the fact that nearly every single virus-related market tumble in the past – from SARS to Avian Influenza to Ebola to Zika - has witnessed a stellar turnaround within a few months, and the implications are quite clear; it would be very unwise to join the herd of deserters and sell out in fear at this stage.
If you’re a smart investor and not averse to risk-taking, you’ll actually use this opportunity to build more equities into your portfolio. The bargains that exist today when you look beyond the top 50 stocks on the bourses are quite lucrative, to say the least. Growth at Reasonable Prices and all that.
Will markets turn around immediately? Hard to say. Will they turn around eventually? Most certainly, yes. Sure, it’s been a disappointing two years; but history tells us that it only takes one liquidity-fuelled breakout to stabilize long term portfolio returns. The question is, will you be sitting on the fence when that happens, or will you be riding the wave? Ignore the noise and stick to your target asset allocation. Events will come and go, but fundamentals will prevail in the end.