By Anand Radhakrishnan
We live in interesting times. Globalization has unleashed many opportunities for the economies world over but has also presented formidable challenges. The accelerated transition of COVID-19 virus from being a regional epidemic to a global pandemic is a glaring example of brutal side effects of an integrated world. The stronghold of today’s global economic interdependence can be gauged by the fact that the adverse effects of global events on an economy can far exceed the domestic positives.
China, the original epicentre for COVID-19, took a series of draconian lockdown measures to contain the virus. This prolonged lockdown has disrupted the global supply chain. As the epidemic gained momentum and engulfed most parts of the world, the global economy now faces aggregate demand shock as well as supply disruptions.
The risks posed by the COVID -19 pandemic are being priced aggressively across asset classes including equity. Indian equity markets, as measured by Nifty, have corrected by 29% YTD, and over 30% from the peak achieved on January 13, 2020. Crude price has slumped to sub-25 USD/bbl triggered by a weakening global demand and a supply glut triggered by a standoff among large oil exporters. (Data source: NSE India, Bloomberg)
Source: Bloomberg, data from 31 Dec 2019 to 31 March 2020
The COVID-19 Bear Market - Taking a Historical Perspective
In general, a bear market is defined as one where the leading equity indices fall by over 20%. By that definition, India has now gone through three bear markets in the current century – (1) The Tech Bubble Burst (2000-01), (2) The Global Financial Crisis (2008-09), and (3) the ongoing COVID-19 led market fall. But like every bear market, this bear market has some traits that stand out. Firstly, the fall has been too fast. The “average daily decline” so far has been 0.62%, as compared to 0.22% during GFC which itself was unprecedented. And secondly, this fall has happened in a relatively robust macroeconomic backdrop for India as compared to the previous bear markets. It may be useful to appraise the current situation through three prisms – Economics, Sentiments and Valuations. This will hopefully provide a valuable guide to the current investors. (Data source: Bloomberg)
The Way Forward – A case for equities!
“Bull markets are born on pessimism, grown on skepticism, mature on optimism and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.” - Sir John Templeton
The ongoing correction began from a point of relatively expensive valuations. This has added to the steepness of this correction. While we cannot be certain about a market bottom given the uncertainties around the pandemic, valuations appear to be attractive for long term investors. A disruption in global trade could prevent a V-shaped recovery. However, adequate support in the form of monetary and fiscal stimulus could provide a counterbalance.
Given the mix of robust macroeconomic backdrop, fearful sentiments and attractive valuations, we believe every rupee invested at current levels could have a favourable risk-adjusted reward for the long-term investors.
What to Do
What Not to Do
(Anand Radhakrishnan is CIO-equities at Franklin Templeton India)
We live in interesting times. Globalization has unleashed many opportunities for the economies world over but has also presented formidable challenges. The accelerated transition of COVID-19 virus from being a regional epidemic to a global pandemic is a glaring example of brutal side effects of an integrated world. The stronghold of today’s global economic interdependence can be gauged by the fact that the adverse effects of global events on an economy can far exceed the domestic positives.
China, the original epicentre for COVID-19, took a series of draconian lockdown measures to contain the virus. This prolonged lockdown has disrupted the global supply chain. As the epidemic gained momentum and engulfed most parts of the world, the global economy now faces aggregate demand shock as well as supply disruptions.
The risks posed by the COVID -19 pandemic are being priced aggressively across asset classes including equity. Indian equity markets, as measured by Nifty, have corrected by 29% YTD, and over 30% from the peak achieved on January 13, 2020. Crude price has slumped to sub-25 USD/bbl triggered by a weakening global demand and a supply glut triggered by a standoff among large oil exporters. (Data source: NSE India, Bloomberg)
Source: Bloomberg, data from 31 Dec 2019 to 31 March 2020
The COVID-19 Bear Market - Taking a Historical Perspective
In general, a bear market is defined as one where the leading equity indices fall by over 20%. By that definition, India has now gone through three bear markets in the current century – (1) The Tech Bubble Burst (2000-01), (2) The Global Financial Crisis (2008-09), and (3) the ongoing COVID-19 led market fall. But like every bear market, this bear market has some traits that stand out. Firstly, the fall has been too fast. The “average daily decline” so far has been 0.62%, as compared to 0.22% during GFC which itself was unprecedented. And secondly, this fall has happened in a relatively robust macroeconomic backdrop for India as compared to the previous bear markets. It may be useful to appraise the current situation through three prisms – Economics, Sentiments and Valuations. This will hopefully provide a valuable guide to the current investors. (Data source: Bloomberg)
The Way Forward – A case for equities!
“Bull markets are born on pessimism, grown on skepticism, mature on optimism and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.” - Sir John Templeton
The ongoing correction began from a point of relatively expensive valuations. This has added to the steepness of this correction. While we cannot be certain about a market bottom given the uncertainties around the pandemic, valuations appear to be attractive for long term investors. A disruption in global trade could prevent a V-shaped recovery. However, adequate support in the form of monetary and fiscal stimulus could provide a counterbalance.
Given the mix of robust macroeconomic backdrop, fearful sentiments and attractive valuations, we believe every rupee invested at current levels could have a favourable risk-adjusted reward for the long-term investors.
What to Do
What Not to Do
- Avoid Panic Redemption. Panic selling in the current environment can cause considerable harm to long term return potential of portfolios. Investors could end up selling at throwaway prices what was accumulated through a long accumulation journey.
- Do not violate your considered asset allocation. Your asset allocation reflects your risk-taking ability as an investor. Investors should invest but keep in mind their medium-term needs for cash, regular income needs and other assets in the portfolio.
- Do not bulk up too quickly. Many investors could tend to jump in too quickly. There is no way to call an exact bottom, nor can we tell how far it is. A suitable approach is to layout investments in small parcels over the next, say like, two or three quarters
(Anand Radhakrishnan is CIO-equities at Franklin Templeton India)