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BW Businessworld

COVID 19: This Too Shall Pass

In an interview with BW Businessworld, Prableen Bajpai, Founder & Managing Partner, FinFix Research & Analytics, talks about the effect and affect of coronavirus on Dalal Street

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It’s pure mayhem on D-Street today, with small caps falling by 10% as we speak… What would you advise investors to do right now? Stay put, exit, or accumulate more?

It’s a testing time for investors globally. If we talk about an investor holding a small cap fund, I would assume that their investment horizon is seven years plus and if that be the case, one shouldn't panic and exit. Doing so would only turn the present notional losses into real. Such troubled times in markets always present a good opportunity, and investors should continue with their SIPs especially during weaker markets. Investors who have invested a lump sum can look at increasing allocations in a staggered manner. Just a word of caution here: the bottom is never known, and any incremental investments shouldn't be done expecting quick returns. They must be further in alignment with one's asset allocation and risk appetite.

During capitulations like these, there’s always the fear of a false bottom being formed… we saw this thrice during the 2008 crash when markets witnessed a dead cat bounce of more than 10-12%, trapping investors. Would you say that we need to watch out for such threats right now, or is this different because it’s a more event specific risk?
The year 2008 was different in many ways but there are lessons from any such event. The possibility of something similar cannot be ruled out. Honestly, timing the markets, be it on the upside or downside, is always difficult. The bottom is never known and in the current situation, it is a black swan event. The market movement is directly guided by the way COVID-19 is spreading and news of it impacting lives and businesses. In the present market turmoil, it’s important to stick to the course, and indulge in additional buying only in a planned and phased manner.

Do you think markets are overreacting to the Coronavirus threat, or is this just a correction that has been long overdue as a result of corporate India’s poor show since 2008? After all, we’re still at 23X trailing earnings despite the steep fall…
Initially, the correction triggered in some markets like India and the U.S. did seem like something that was waiting to happen. The Indian markets were scaling heights driven by handful of stocks in the backdrop of dampened economic scenario. Having said that, elevated P/E levels in India are seen as indicative of hope among investors of better times. As we talk, the market correction today has brought the P/E for Nifty to around 21 levels and that for Sensex to less than 20. But it’s usually sentiments that drive the markets, especially around peaks and troughs.

Given that the 25-year return on the SENSEX has now been roughly 10.2%, is it time, as investors, to start realigning our expectations from the standard 12-14% long term return supposition from equities? If that is the case, does a 2% incremental return over fixed income really justify the risk…and pain… involved?
I’m a strong believer of the fact that the right asset allocation builds the foundation of a portfolio. A number of studies suggest that almost 90% of the returns on a portfolio are guided by the right asset allocation. Having said that, asset allocation isn’t complete without the presence of different asset classes be it equity, fixed income or gold. The proportion of each asset depends on multiple factors. When we compare fixed income and equities, the math isn’t that straight. Equity as a growth asset moves up in a non-linear fashion unlike a fixed income asset, which moves up in a linear manner. Since over the years the returns from fixed income products have reduced, the expectations from equity investments need to be reset as well. If you are only holding fixed income products, you may negate volatility, but you still face the risk of inflation. Over the longer timeframe, the inflation risk would be greater than the risk of volatility from equities. In terms of returns, I personally feel that even a CAGR of 10-11% is healthy.

Seeing your portfolio slip deeper into the red each day can unnerve even the most seasoned investor… Every day, it seems like yesterday was a better day to redeem… Behaviourally speaking, what should investors watch out for right now?
We as investors feel jittery about our portfolios because there are apps and platforms which allow us to do so. There is news all around and the noise creates doubts. Patience is the key, be it any asset. When it comes to a hard asset (such as real estate and gold), we usually do not panic or take a call to sell because the market is weak, or the investment isn’t growing the way we intend it to. We remain invested and give it time. The same time and patience is needed for financial assets as well. Sadly, during such markets, investors often panic and exit. This results in them becoming the ‘real victims’ of these fluctuations and they end up with low or negative returns and a bad experience. If one’s portfolio is diversified across assets, there is a contingency fund in place, one is adequately insured (health and life) and equity investing is aligned to financial goals, one shouldn't get worried with such events. This too shall pass.