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The Economics Of An Epidemic

A focus on long term investment is crucial. There is a flight to safety, and traditional safe havens.

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The Chinese Year of the Rat, 2020, is meant to be a time of prosperity. Instead, Covid-19 ushered in a historic market fall, leading to a screeching halt for the longest bull market in U.S history, and the steepest one day fall since the 1987 stock market crash.  

In India, the initial impact of the virus was likely to play out through trade channels, however, due to the recent increase in the number of local cases detected, India will experience a slowdown in domestic demand as well. As the number of cases of Covid-19 in India rise, the economic impact is expected to accrue from both demand and supply side. Aviation and tourism are the first to experience a slowdown in addition to every blue-chip company across India that has global interdependencies and drivers abroad from IT to banks, power to telecom.

The stated number of infections in India on the face of it seems to be a gross underrepresentation of the magnitude of the issue here. The density of the population in India and the lack of effective testing mechanisms could cause further volatility in the markets. 

Slow down due to social distancing can devastate growth- or cause contraction, as many sectors are experiencing, the impact of which could last years to come. 

Opportunity in volatility 

The situation is evolving so rapidly, giving little room to absorb the implications of each new development before the next one comes to light. However, capital market fundamentals remain the same. At present, it is hard to ascertain when the markets will stabilize, but there are risk mitigation strategies that investors can adopt during such volatile times.

A focus on long term investment is crucial. There is a flight to safety, and traditional safe havens.

With valuations at a five-year low and earnings forecasts and growth tempered amidst such volatility, it may be a good time to start investing in stocks that have faced severe price correction. The end to this carnage might not be around the corner, holding upwards of 25 percent in cash is a prudent risk mitigation method at the current juncture.

The market sell-off may be short-lived, and stocks with good quality management and high levels of governance might come out stronger, making them a compelling investment opportunity. As historically experienced by long-term investors in previous crashes. As long as this investment is systematic and structured with a long-term outlook, investments now could lead to outperforming portfolios over the long term.

Additionally, India has an opportunity to close the gaping gap that coronavirus has caused in the supply chain by accelerating manufacturing activity. This could prove to be a long term boon for brand India while creating job opportunities.  

Accountability in markets

Even as the flagship fund of the largest hedge fund globally, Bridgewater Associates, is down 20%, I continue to hold that it is possible to outperform not just competition, but the markets as a whole. For example, we’ve outperformed the Nifty by 15%, and not just the Nifty but several other indices. It is possible to preserve client capital amidst the COVID-19 meltdown, a black swan event no less, by relying on the fundamentals - mitigating risk while seeking opportunity in the volatility. Wealth management as an industry has evolved and we are witnessing a shift from product-driven to a client-driven approach. What helps in outperforming the indices is being structurally client aligned and aiming to be all-weather fund, forsaking some of the gains in extremely bullish markets by maintaining a certain level of cash and hedges at all time.

Going forward, we can expect HNIs to not only judge their asset managers based on their historical fund performance but also their appetite for risk and volatility. Recent occurrences have established interdependencies that topple markets come rapidly, and in such times, a certain comfort with volatility needs to be embraced. In such a changing paradigm, HNIs will increasingly seek fund managers who have a knack of finding opportunity in times of volatility, who run a more balanced portfolio.

Market Recovery

While it cannot be ascertained when the markets will recover as the shock is driven by sentiment, we do expect relief as governments take unprecedented action to contain the disease and ease market tension. While the markets might continue to stay in a bear phase over the next six months or so, we see a drift in investor sentiment wherein funds with an inherent metric that takes advantage of volatility can provide an artificial floor to overall fund performance.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

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coronavirus outbreak coronavirus pandemic markets

Nikhil Kamath

The author is Co founder & Chief Investment Officer, True Beacon, Zerodha and RainMatters.

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