The last one month or so has been one of a kind for the investors in stock market. The volatility witnessed probably surpassed what one might have experienced in 2008 or before.
Within a month, the benchmark indices are down 20% and at one point of time were down 30%.
How can one forget 13th Mar’20, wherein the trading was halted with markets down 10% and then not only the markets recovered all the losses but closed 4% higher than previous day.
In fact, a lot of stocks moved up 40-50% from day’s lows while the actual change in the value of the business was probably zero.
Such wild moves can be gut wrenching, but only help the cause of making an investor emotionally and psychologically stronger. Unless, one is leveraged, either on portfolio level or in terms of the businesses one is invested in, we believe the upside is more certain than the downside from the current levels.
What makes us believe in the certainty of recovery? So, every time the markets correct, especially the kind we have witnessed in the last 1 month, a common thought that comes to mind is that probably this time is different.
Yes, the reasons, catalysts, duration, velocity of the market corrections can be different, but the whole premise of cyclicality, i.e. recovery after correction and correction after recovery hasn’t changed over the years and all this while our markets have trended upwards.
To counter “this time is different” thought process, we recently wrote two articles and believe there’s much to gain from the study of history of market cycles than trying to predict the future itself.
You can read the two articles at the following links:
We believe, if you are still standing, willing to invest or fine tune your portfolio, you can give a pat on your back and brace up for longer term wealth creation.
Corona Virus impact – We are not an expert on the issue; however, one thing is clear that the short-term impact on the businesses and the economy is for real.
Earlier, the major concern was on the supply side, i.e. the supplies from China. Based on our readings of various corporate announcements, factories have started production, workers have started coming back and barring a few industries and companies, may be the supply chain won’t be impacted much.
What the market is probably concerned more about is that the demand side will see some impact. Italy is under lock down and it is expected that other parts of the Europe too will see a lock down.
Similarly, US too may see varying levels of lock-down.
It has been observed that the countries that implemented lock-down, including China, have been able to control the spread and bring down the new cases drastically.
We believe, most of the countries including India have woken up to the above fact and therefore the businesses may see some disruption for a few weeks or months and the earnings will be impacted in the short term, but to us, for most of the businesses, it doesn’t look like a new normal and expect faster recovery after a brief lull.
How are we positioning ourselves? During periods of weakness, the strength of balance sheet becomes more important than ever.
As we look at the stocks under our coverage, we believe most of them are not overly leveraged, have comfortable interest coverage ratios and can probably sail through periods of weak demand.
Also, none of them are in the midst of major debt funded capex.
We also believe that while valuations tend to lose meaning in a panic-stricken market and a 10 PE stock can still become a 5 PE stock, it will be the other way around during the recovery phase. Also, a lot of expensive stocks of the last 2 years could probably face some de-rating.
However, for the stocks to re-rate, earnings will have to grow and here again most of the companies under our coverage seem to have created capacities for the next leg of growth, as and when it happens.
Last but not the least, in times like these it’s difficult to determine with certainty the impact of the lock-down on various sectors and industries. The prices have corrected across the board and in our view rather than thinking of the top-3 or top-5 stocks, its important to spread one’s investments across the positively rated stocks.
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