March 15, 2020

Market Crash and Moving Forward: What to do in this correction

By Roy

Key points to cover:

  1. The day of Lower Circuit
  2. Back To Future
  3. Dealing with Demon Corona
  4. Buffet the Old Wine
  5. Retail investors to do list 

The Day of Lower Circuit:

13.03.2020: Market opened and boom it goes. Goes Southwards! The Nifty and Bank Nifty hits lower circuits. Corona Virus is for real. Every one grappling with what consequences it will have. How market will react when the trading will resume as trading was halted for 45 mins after the lower circuit. Circuit low of NIFTY was 8555.15. Treat this as a sacred number.

Market resumed and to everyone’s surprise it looked stable as if nothing happened 45 mins back. Screen was flashing that USA declared emergency and President assured all necessary steps will be taken to control this pandemic. At this point Dow Futures were trading in green territory, 700+ points up. India took that confidence from US and started to rally. During the day’s session there was time when Nifty clocked a high of 10159.40, a 5.94% rally from previous day close and 18.75% rally from the day’s circuit low. This kind volatility was never seen in theIndex. Nifty closed at 9955.20 with 3.81% appreciation. I don’t have data pool of global markets, but I assume, this may be the first time in modern history that an index is closing with 3.81% gains after hitting a lower circuit in the same day. Lower circuit defines the bottom of confidence level where there is no buyer and all sellers, and ending with such appreciation, defies all logic.

Now let me tabulate few data points for your understanding. The table below shows the returns of Nifty in % terms Since Jan, Feb and March 2020 till 13.03.2020.

since January
since February
since March
Catastrophic, isn’t it?

Back to Future:

I remember one famous quote: “Never let a good crisis go to waste” _ Winston Churchil.
Any market crash comes with huge pain. Mostly people are invested fully, devoid of any spare cash to invest further. Portfolio shows huge depreciation and constant negative news flows make it worse.
Through this post I will paint a general picture of  how to go about the investing job in this market scenario. I will try to explain why one should try to invest in or buy this dip.
As I am trying to explain the overall market scenario, I will stick to my Nifty example and explain the scenario through Nifty Index as Index will, in a broader-way, explain the overall situation.

This is Nifty last 5 years chart. You can clearly see, nifty is back to the levels, where it was in July 2017.
As per pure fundamental analysis, if you consider the price of any stock is a factor of its earnings, then you can buy the index at price of July 2017 and at the earnings of March 2020. Since July, 2017, this top line companies have added earnings to their kitty, you are getting it for free.
On July 2017, EPS of Nifty was around Rs. 394 and as on date (13.03.2020) Nifty EPS is at Rs. 440. So, there is an appreciation of 11.6% in the earnings of Nifty shares. So, “Accha Maal, Sasta Bhaw”, that’s what an investor craves for.

Demon Corona:
As more and more news emerge out, we see the pandemic is for real. USA are in a state of emergency and provinces like Seattle are in a complete shutdown. Europe seems to be worse. World Health Organisation recently said the nodal point of this virus pandemic has been shifted from Wuhan, China to Europe. Italy is in a real bad shape. In India, as of now, things seem to be under control. Airport screenings have been put in place, and incoming passengers are screened and travel history is being questioned. Those who are  diagnosed, are quarantined. Embargo on public gatherings, malls, theatres, gyms etc. India seems to be dealing with this demon with war footing.

I have gone through various foreign articles which says to fight with this epidemic, the only way out is to slower down the transmission rate.

As peak tends to flatten, we are more in control of the situation. Because, if in a city, if there is capacity to absorb 300 people in ICU wards and 500 people demand intensive treatment, the structure will collapse. If we slow down the transmission, the peak will get flattened and number of casualties will be less.

Most experts are of the view that it will subside within 1-2 months as we have seen in the case of epicentre Wuhan. Whenever things go back to normal, we will still be grappling with the deficit that we will create in these months of slowdown or shutdown. Say, 1 quarter of growth is eaten up by this pandemic. But unlike 2008, we are not facing any structural issues. In 2008, big boys were failing, world seemed to be at the brink of collapse. This time around, it is not a fundamental financial collapse but a transitional halt in the economy. Market has corrected in the same lines of 2008 but we are structurally and economically better placed than 2008 meltdown. Only one thing I can say, this too shall pass.

Buffet !The Old Wine:

The Old Monk Strikes again. Old monk means Warren Buffet not anything else. Someone opined that ‘Given a choice between passion and principle always chose principle. If you win with passion you will lose the principle’. Warren Buffet and his fund has never compromised on their value investing principle. He sat on cash and even received criticism for under-performance compared to Dow in last 7-8 years. A study says, he is sitting on a pile of cash.
After this correction, old adage comes true again, “Cash is the King”. He stayed away from investing in a market which according to him was over-priced. Now he can go for shopping again.

Now what to do as a retail investor:

Those who are investing through SIP, simply don’t worry and continue the SIP. In a secular bull market, lumpsum investing is more beneficial. SIP becomes lucrative if there is volatility. As you are investing in both up and down cycle of the market, you will get the benefit of cost averaging.
If anyone plans to deploy some additional cash in Mutual Funds, do it strategically. Don’t empty your purse at one go, rather divide it in 10 installments and invest at every fall. I have pointed out various mutual funds in another post. You can have a look.
Don’t go for Future and Options trading who are new to this market. Vix is well beyond 50. Even pro traders are losing like anything, don’t try to dare this market with leveraged products.
Those who want to invest in stocks, I will write a separate post regarding the valuation and investment opportunities various stocks throwing at us.
Final Note:
Don’t go hell bent in one go. Strategize. Market is not going to anywhere. As long as there is uncertainty regarding the corona issue, market will be volatile and will through up opportunities. Be prepared to grab them.
Advise your financial investor before investing.