The NIFTY 50 has fallen 20% in the last month. The sell-off has been a part of a coordinated fall across all major global markets. Several issues have come together with the falling market to create a sense of panic:
# Corona virus scare and the associated global sell-off
# Crude oil plunge following the OPEC/Russia face-off
# Yes Bank rescue and its rub-off on other financials
The spread of the COVID-19 —coronavirus is a Black Swan event that continues to unravel across the world. The economic impact of the contagion is likely to be deeper than expected even a few weeks back as more severe travel restrictions are put in place and a number of countries go into effective lock-down.
While short-term disruptions are likely to be severe, the market impact will depend on the medium to long-term implications of the contagion. One big worry for the market is that an already slow global economy falls below stall speed and gets into a prolonged recession from these disruptions. Central bankers are reacting to these worries by aggressively cutting rates – although in our view, these rate cuts are unlikely to have the desired impact in the short term as demand for products (especially discretionary spending) will remain weak till we see fears around contagion subside.
For India while the number of cases are still low, the precautionary steps and rub-off from global measures are likely to affect demand in a number of sectors such as airlines, tourism etc. Further, it remains to be seen how the virus situation itself develops over the coming weeks. The market is also worried about highly leveraged companies and weakly capitalized lenders. This issue has again come into limelight with the Yes Bank rescue. Steps from the RBI and the government to restore confidence in the credit markets will be key to stabilizing sentiment.
This year is all about survival of the fittest as we have been re-iterating for the past few months. Markets may remain volatile in the short to medium term, but businesses tend to be less volatile in the long run – even though they may face short-term hiccups for a quarter or two owing to the current challenges. Companies having strong balance sheets and strong leaders with effective strategy would sustain and thrive once the volatility subsides. We always believe that tough times provide the true test for all businesses and what differentiates the sustainable businesses is their ability to handle such times – and that’s exactly what we look for when investing our funds.
The markets will always have a high level of dispersion between quality and unsustainable names. Avoiding mistakes of investing in traps has always been and will remain the key bedrock of our investment process that we expect to help us sustain and survive over the long term.
Investors should avoid taking any knee-jerk reaction to the current sell-off. The ongoing downfall provides a great opportunity to buy – although with a 3 to 5 years’ horizon. Further investors should look at making steady investments spread over the next 3 to 6 months to avoid taking any undue timing risk. As the economy rebounds from these shocks over the medium term, the strong quality players will be in a perfect spot to take advantage of the opportunities that are presented.