Investments during the crisis

Investments during the crisis

Today, on the 27th of March 2020, as we enter a critical phase of mankind’s deepest crisis, stock markets over the world reflect the uncertainties. Fact is, stock markets never like uncertainties and this time around it is uncertainty personified. As investors, we wonder what we should be doing about our investments – buy, sell, or hold? It is also a good time to review our long-term Investment thumb rules

This too shall pass… As inconceivable as it may seem right now, in a few weeks or few months from now, humanity would have won the war against this dreadful disease and after the period of disruption, all economic activity would be ready to press the restart button albeit from a pushed-back level. Companies, after a shortfall in sales and profits for 1-2 quarters would return to normal functioning and markets too would recover

Our situation before the crisis

  • Before the crisis evolved, the valuations of our markets were hovering at near all-time-lows which was quite different from other markets like US, which were trading at multi-year-high valuations
  • By the end of year 2019, most experts in India had established that the economy had bottomed out. Most sectors had witnessed right-sizing and de-leveraging over last few years making them ready to begin a steady revival phase from 2020

Our situation during the crisis

  • Our markets have fallen as much as the more expensive markets and as much as those of the more affected countries
  • The concerted efforts by the GOI, the RBI and SEBI display a strong commitment from the authorities to not just control the spread of the virus but to also minimize the impact on the economy and markets
  • Crude oil prices have fallen sharply from $60+ levels to the $20s. Assuming a $30 average price difference for the year, we save Rs. 2.5 lac Crore
  • The main reason for our market fall has been the $10 Billion withdrawal by Foreign Investors in a month. Domestic Mutual Funds have been net investors on most of these days. While FII withdrawals are reducing, the positive trends from MFs are expected to continue throughout the year

Outlook beyond

  • Interest rates across the developed world have reached near zero levels. This will help our country’s needs for capital to fund growth in infrastructure and other areas
  • Many global companies looking to move their manufacturing facilities out of China, may just hasten their moves after the virus situation exposed their over-dependence. India has put forward an attractive 15% tax incentive for all new manufacturing facilities setting up in the next 3 years
  • Demand in our stock markets to be steady as Mutual Fund inflows remain strong with only SIP flows amounting to more than Rs.8000 Cr a month
  • India’s long-term growth prospects anyway remain to be strong

Thumb rules to follow in the current scenario in the immediate term

  • Markets are at their lowest point in times of such extreme uncertainty. Such low points of the markets are not for selling. Depending on our asset allocation, this is a time to buy
  • If we have an adequate % allocation in Equities, then we could just sit tight and see the volatility through as an observer
  • Let the SIPs continue

Thumb rules to establish for our long-term Investment strategy

  • Safety corpus – An equivalent of 18 months’ worth of expenses should always be buffered in a safe and liquidable fixed return investment like a bank deposit. This safety net is important for us to think straight in times of any crisis and not break any investment thumb rules (Buy-low, sell-high)
  • Just as SIPs are the best way to invest in the markets – systematically, the best way to take out money from the markets (say for a goal requirement) is also by withdrawing systematically (SWPs). E.g. if one needs a large amount to fund higher education for a child, one should divide this amount in 24 or 36 equal amounts and start withdrawing 2-3 years in advance every month – systematically! This reduces our chances of withdrawing the entire amount during a panic event
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