The answers to all your questions on the disease outbreak spreading across the world and its impact on the stock market.
1. What is Corona Virus and how and when it got started?
Let us break this question into two parts:
What is coronavirus?
As per the definition of WHO, Coronavirus disease (COVID-19) is an infectious disease caused by a newly discovered coronavirus. And how it spreads? The COVID-19 virus spreads primarily through droplets of saliva or discharge from the nose when an infected person coughs or sneezes.
How and when it got started?
The first case of Covid-19 can be traced back to November 17, 2019 in Hubei (province in Central China). The capital of Hubei, Wuhan emerged as the hotspot of the virus, before it spread to almost every country (more than 200 countries) in the world. More than 2.1 million people are known to be infected, out of which 5.5 lac people have recovered, while more than 147,000 deaths have been recorded. This makes the fatality rate at 21% on the closed cases as on 17th April 2020.
2. Countries which got severely affected by the Corona Virus and have the maximum number of cases
While it got started in the city of Wuhan in China, here is the statistics of cases reported in various countries as on 16th April 2020.
As you can see, India is much better placed (lower cases per mn population and lower deaths per mn population) than the rest of the countries due to:
- Proactive measures taken by the central and state governments
- Lesser international traffic
- Climate advantage
- Advantage of learnings from successful countries (China, South Korea) and
- Possibly our strong immunity systems
3. How the stock markets across the world have reacted since the Corona Fear started? (Correction in benchmark indices)?
Let’s take a look of how the global markets performed since the outbreak of the coronavirus fear.
However, if you look at the SSE 100 Index (China), it was at the bottom on March 23, trading at 5061 from a high of 5852 on 5th Mar’20, a fall of 13%. As the recovery took off, the stock market also recovered and is up by 9% since Feb’20.
It’s just a matter of time, we will see Indian markets recovering back to their original levels.
4. Let’s take a look at a few good large cap, mid cap and small cap companies in the stock market and the % correction happened in these companies?
There are many companies (across all market cap – large, mid and small cap) that witnessed a steep correction in their prices.
(Disclaimer: Please do not consider the above examples as Research & Ranking’s recommendations)
However, considering the strength in the fundamentals of high-quality companies, such companies are quick enough to rebound from any temporary hiccups in the stock market. Few stocks such as Dr Reddy and Bharti Airtel are trading at even higher levels as compared to their Jan’20 levels. While few other stocks such as ICICI Lombard and Britannia have recovered almost 50-90% of their losses, while Maruti Suzuki, GCPL, Emami, Axis Bank & L&T have recovered some of the losses.
It’s true that the valuations are attractive, however, one should not jump in all the stocks that have witnessed correction in the stock prices. As we can see above, it is crucial to conduct the fundamental analysis and invest only in high-quality companies in a staggered manner.
5. Why the recent situation of stock markets/economy is different from the 2008 Crisis?
It’s completely different. There are three reasons why we say so:
- Liquidity vs medical crisis: The crisis of 2008 was a result of the credit crisis, which systematically led to a liquidity crisis in the global banking systems. So, if you look, the most hit sector was the banking and financial sector post the collapse of Lehman Brothers. However, the current coronavirus crisis is the effect of a pandemic, which is eventually paving the way for the financial crisis. As we can see, almost all sectors have taken a hit.
- Capacities: In 2008, all sectors were operating at normal capacities. Coming to the current scenario i.e. 2020, we are experiencing complete lockdown, with most of the industries have come to a halt, barring few factories of few industries operating at a minimal capacity of 25-50%.
- India’s growth rate, impact and tailwinds: In FY2007-08, India was growing at 7.5-8%, whereas India’s growth rate today stands at approx. 5% in FY2019-20. If you look in 2008, the impact on India was lower as compared to developed and other developing economies. Even today, the impact on the economy would be limited as India goes back to routine. Yes, we may see a short—mid-term impact on account of FII outflows and banks loan books getting impacted. However, as compared to 2008, India has become much more matured today to withstand such crisis (thanks to the learnings of 2008 and other favorable such as reforms, demographic dividend, stable and resilient government, etc.)
Also, in the year 2008, the valuations were high. If you look closely, the scenario is similar to the 2002-2003 scenario. Here’s why we say so:
With this, subdued growth in earnings, declining interest rates, slump in auto sales are the other similarities that the current scenario has in common with 2002-03.
While the spread of corona virus to over 200 countries is scary, the positives is lower mortality rate, fresh cases having peaked out for many countries and hope of availability of vaccine in the foreseeable future.
Always remember that the stock markets are forward-looking
This makes them the best barometer of the health of an economy. Let’s take the case of the U.S markets.
As seen in the above chart, Dow Jones hit the lows of 18591 in March 2020, when the outbreak was under control. Considering today, U.S. is the most affected country with more than 6.5 lac cases. However, if you look now, Dow Jones is up by 30% since the bottom.
What does this signify?
The markets on 23rd March 2020 were expecting an increase in number of cases, and hence the humongous drop in the stock prices. In simple words, markets have already factored in the rise in numbers in the month of March, before even the event took place.
On the other hand, if you look now, as we already said that the Dow Jones is up by 30% and even Sensex is up 21-23% from its low, the markets are predicting normalcy as well as beginning of curve flattening in the days ahead.
As we already said before, stocks markets are forward-looking, as they already factor in the events that will take place 2-3 months down the line.
Key positives of India are not yet reflected in stock prices:
- India’s corporate tax rates rationalization can attract major MNCs to setup manufacturing base in India, and also to lower their dependence on China given the current virus issue.
- With major reforms already implemented in past like demonetization, GST and current weak state of economy, it’s unlikely the govt will launch mega reform which will disrupt the economy again. Also assumes significance as we have crucial state elections like Bihar, UP, West Bengal in next 2 years and BJP has recently lost in MP, Rajasthan, Delhi and Maharashtra.
- Global oil price cuts would result in +$35bn savings or +1% of India’s GDP.
- Recent cut in benchmark interest rates
- Nifty VIX index, which measures the market risk premium, has declined by 45% to 46 as on 16th April’20 from the peak of 84 on 24th Mar’20, thereby indicating expectations of lesser volatility ahead.
In our opinion, the markets should see a bounce back soon considering the above tailwinds.
6. Despite the severe correction in markets, why FMCG and Pharma companies have delivered superior returns in last 2-3 months?
To answer this question, let me tell you the concept of defensive stocks. A defensive stock is a stock that provides consistent dividends and stable earnings regardless of the state of the overall stock market. There is a constant demand for their products, so defensive stocks tend to be more stable during the various phases of the business cycle. Stocks from sectors FMCG, IT and pharma are considered as defensive stocks.
Both pharma and FMCG industries have been exempted from nation-wide lockdown as it came under the essential services.
Here are how these sectors have performed.
- Companies dealing more in essential services are witnessing a jump in their stock prices. Hence, as seen above, companies such as HUL and Dabur have even seen stock prices going up as compared to their Feb’20 levels.
- This industry hasn’t seen much momentum since 2016, owing to stringent FDA norms. Considering the relaxation in norms by FDA and India contemplating to ease export restrictions, this sector is experiencing a few tailwinds, and hence the rally.
- Also, the U.S. is worried about drug shortages, and to ramp up the shortage, there are only two destinations to manufacture drugs – China and India. As India supplies more than a quarter of the world's generic drugs, this will act as a big positive for India’s healthcare sector.
- With FDA approving hydroxychloroquine as new drug application to address COVID-19 related shortage, Indian pharma companies shipping hydroxychloroquine tablets to coronavirus-hit countries, will benefit from the current crisis.
- Post Covid-19 world, all countries shall aim to amp up the healthcare services, which is again a big thumbs up for the Indian healthcare sector.
7. What are some of the steps taken by RBI and the government to tackle the Indian Economy?
Global economic activity has come to a near standstill due to COVID-19 related lockdown and social distancing in affected countries, including India.
To boost the country’s economy RBI has taken a series of steps such as:
- Repo rate reduction 75 bps to 4.4% which will lower interest rates and EMIs on loans.
- Liquidity infusion: Additional liquidity of Rs.3.75 lakh crore, i.e. 3.2% of total GDP, to be provided through various measures such as CRR cut, Targeted Long-Term Repos Operations (TLTRO) and Marginal Standing Facility (MSF)
Regulation and supervision
- Moratorium of 3 months on all term loans by any financial institutions
- Moratorium on Interest payment for 3 months for all working capital loans
- Working capital loan scheduling and tenure to be revisited and adjusted for the moratorium
Boost liquidity in NBFCs, MFIs and HFCs
- Targeted Long-Term Repo Operations (TLTRO) 2.0 – RBI to undertake TLTRO 2.0, for an initial amount of Rs. 500bn, and it can be revised based on further assessment of demand.
- Funds will be invested in NBFCs, with 50% earmarked for the mid-sized, small-sized NBFCs and MFI. 50% of funds to be invested in bonds/CPs of small and mid-sized NBFCs and MFIs. Investments to be made within 1 month of raising funds from RBI, to be classified as HTM and not to be reckoned in large exposure framework.
Steps taken to boost lending by banks
- Fixed rate reverse repo rate cut by 25bps to 3.75% from 4.00% earlier.
Steps taken to ensure that lenders have more funds available for growth
- Liquidity Coverage Requirements have been reduced to 80% with immediate effect, which will be gradually restored in 2 phases by April 1, 2021.
- The liquidity coverage ratio (LCR) refers to highly liquid assets held by financial institutions to meet short-term obligations.
Special refinance facility to refinance banks
- NABARD will be made available Rs 250 bn, SIDBI Rs 150 bn, and NHB Rs 100bn. Additional requirement, if any, would be evaluated and provided for by RBI.
Relief to states
- RBI has announced a 60% increase in the Ways and Means Advances (WMA) limit of state governments. WMA is a facility for states to borrow from the RBI.
- By increasing the borrowing limit, RBI has provided a substantial relief to states whose revenues have dried up significantly due to the lockdown.
To summarize, the series of steps taken by RBI will infuse liquidity in the market to a greater extent by making loans and working capital cheaper for MSMEs, farmers and the poor. With this, it has taken significant steps to boost consumption in India to revive the economy.
8. Is this the right time to buy the fundamentally good stocks for long term? If Yes, why? If No, why?
Firstly, there is no such thing as the right time to buy fundamentally sound stocks. Every day is a good day to buy fundamentally sound stocks. As we saw in question 4, there may be temporary hiccups, but high-quality stocks are the first ones to rebound when the tide changes.
Even if you look at the history, say 2008 crisis or 2001-02, markets have always delivered superior returns as compared to any other asset classes, generating CAGR return between 13-16%.
We always prefer buying luxury items or branded goods, when they are available at discount, even go till the extent of waiting in long queues for hours. Then why not the same approach for high-quality stocks?
We are not here to time the markets or say that markets won’t correct further, however, considering the current attractive valuations of many fundamentally sound stocks, there is no reason for a value investor to wait on the sidelines and regret later about the missed opportunity. In fact, it is the most opportune time to kickstart your wealth creation journey as many good businesses are available at discounted prices.
Best practices for wealth creation are:
- Accept that markets will remain volatile in near term.
- When you buy such stocks, always keep a long-term horizon (3-5 years) while investing in these businesses.
- Also, invest only that portion of the money that you don’t need over the next 3-5 years.
- Avoid getting distracted from information overload/distractions/rumors via forwards on WhatsApp/Twitter/news channel.
- Don’t recommend selling portfolio and trying to reenter at lower levels.
- We suggest investors should start accumulating good stocks in a staggered manner, all the positives that are being ignored currently will contribute in the market rally as soon as the coronavirus related scare peaks out.
- Rather than waiting on the sidelines or adopting wait and watch approach, we recommend you to invest whatever additional money is available to be deployed in equity in 4 tranches - 25% per month for the next 4 months.
At Research & Ranking, over endeavour has been to help investors identify and systematically invest in such high-quality stocks to experience sustainable wealth creation over the long run.
Click here to start investing now in the best investment opportunities currently available in the market.