13 Mar 2020 by Jigna Shah
The Biggest Falls Are Here, But Should We Ignore All This?

Amidst the coronavirus outbreak and the fear of the virus leading to a pandemic, many investors like you are jittery about their stock market investments. And recently, I spoke to one such stock market investor, who was worried about all the news floating on the news channels. I really think the excerpts of the conversation will help you make a sound financial decision.

I am worried about the risk of coronavirus on my portfolio. I never thought at the start of 2020, that something like this would really happen.

The virus is a black swan event, an uncertain event that is beyond imagination, number crunching or valuation. So irrespective of how sound your research or financial models are, black swan events will make your calculations go for a toss. We can't predict their occurrence and their effects. So to answer your question, a virus is not a risk, but an uncertain event that can never be measured. Read about the perils of fear in investing here.

But if you look at the history, markets have recovered from such outbreaks, such as Ebola, Influenza, SARS, MERS, Swine Flu, Zika.

As per a research by Goldman Sachs, the global stock markets have dropped at the start of the outbreak, but tend to rebound by almost 6-15% on an average six months, and 11-30% on an average 1-year after the outbreak came in light. Not that I am trying to say that it will be a case this time as well, but India has two advantages:

  • High and humid climate, which makes India less prone to the virus as compared to the other countries.
  • Considering the outbreak, the country is well-prepared to tackle the disease now.

Agreed, but this has affected many Indian industries as well as Indian Rupee. What is your view on the same? And what about the falling oil prices?

Agreed. This is especially true for the industries, such as automobiles, pharma and textiles as slowdown has created restraints on imports of raw materials. However, let's look at the other side.

Fall in oil prices. Good news for the Indian government!

India benefits from a decline in crude oil prices in many ways.

  • If you look, the prices of Brent crude oil has dropped from $61.30 in Dec 2019 to $35-$40 a barrel in March 2020. This is a massive saving for India.
  • Every 1$ drop in Brent crude results in savings of $1.5 bn p.a. of expenditure, or Rs. 111 bn (at the current exchange rate of 74). Thus, a drop from $60-$65 to $35-$40 now will lead to savings of over $20 - $30 bn, or Rs. 1.4 - 2.2 tn. This amounts to 0.5% to 0.8% of our GDP.
  • Along with a reduced foreign currency outflow, lower oil prices reduce inflationary pressure, thus fostering the growth of economic activity.

Fall in fuel prices. A big thumbs up to boost consumer spending

With the fall in oil prices, there has been a fall in fuel prices as well (though not as sharp as oil prices). Lower fuel prices shall boost consumer spending and the government's income from excise duty.

With the above two benefits, do you think the scenario is as bad as it looks for India?

The news is all there talking about FIIs exiting the stock markets. This is a negative development for the Indian stock markets.

There would be many news. Hence, we always tell our stock market investors to stay from the news, WhatsApp forwards and rumours. As I said before as well, coronavirus is an unfortunate event. The worst thing is no one has any control over this. However, let's look at the positives of our economy.

Reduction in corporate tax rates

The corporate tax rate cut by the government shall amplify the growth of manufacturing industries in India. And this comes at a perfect time when China's economy is at a halt, as this will only support India.

  • We can expand our exports
  • Set up industries here, thus staying true to the government's vision of 'Make in India'.

Fine, but look at the slowdown in consumption. What do you have to say about that?

India's GDP should not be affected much. GDP is calculated as Consumption + Govt Spending + Investments + (Exports - Imports). With India's imports positively impacted due to the fall in oil prices, there is only a temporary hiccup in consumption. It's only a matter of time; we would see a pick-up in consumption.

So tell me, what should I do?

  • As a value investor, stick to your plans and goals and stay away from media news or rumour-mongers.
  • Sell a stock only when you think that the fundamentals of a stock have deteriorated, not in panic. To know more click here.
  • Buy only if you have read enough about it. Beware of catching a falling knife during such times.
  • Hold stocks, unless you're sure about the reason to sell. If you are only selling out of rumours or news, hold them till you've have more information on the stocks you own.
  • During such times, avoid trading and speculating.

Most importantly, look at the bigger picture. As I mentioned before, not everything is going wrong and there are some good news:

  • The fall in oil prices
  • Reduction in corporate tax rates
  • Resilient government
  • Revolutionary reforms
  • India's demographic dividend
  • Urbanization
  • Digitization along with population that has the propensity to spend (Tell me, why will consumption not pick-up?)

When it comes to wealth and health, what works is:

  • Avoiding emotional decisions
  • Trusting the expert
  • Taking precautionary steps
  • And yes, being less fearful. It anyways add to the stress levels, ultimately affecting the health. The lesser said about its impact on wealth, is better!

Hope this helps you to take financially sound decisions. Stay safe, happy investing!

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