What you need to know?
There have been multiple factors responsible for the pandemonium in the markets. The primary reason being that the Coronavirus outbreak was declared as a pandemic by the World Health Organisation. This sounded alarm bells across all major countries in the world. As of today, the virus has spread to over 100 countries. With rising cases in the US and most European countries, the normal economic activity has been severely impacted in these countries. With travel bans amidst infection fears, trade, business, economy, everything has been impacted. Although China is now under control, the shutdown and isolation of China had earlier severely effected the global supply chains. This fear led to massive sell- offs in the global markets in the past weeks. Another international factor was that of falling crude oil prices which negatively impacted the oil economies. Both these factors were on the back of the existing challenges in the economy of slowing growth.
Absolutely no. It is neither the first fall nor the last one you will see. Time and again we have seen many markets crash to the many reasons, both globally and even domestically in India. In India we have seen huge market crashes like the crash of 1992 (Harshad Mehta scam), crashes in 2004, 2007 and especially 2008 which was the worst crash in recent history. There were also some crashes in 2015 and also in 2016 in domestic equity markets. We have gone through huge political uncertainty, wars, riots, scams, corrupt governments, weather fluctuations, demonetisation, GST and everything in-between. How did it impact the markets in the long run? In January 2020, the markets made all-time highs. That's the fact. I am not going into details of how many falls were there and how much the markets returned after every fall. It will take a lot of time without much value addition.The question is what we have learnt from such huge falls?
History tells us the following....
- There is no way you can predict the extent of the fall and can never find the bottom of the fall.
- Market crashes provide the best opportunity for people to enter the equity markets.
- No matter how steep the fall or how quick the fall is, markets do bounce back like handsomely.
- Such market events occur time and again in the markets and are like a reset button which refreshes the markets.
- Market crashes throw up winners and losers. It is what you do now which will greatly impact your portfolio returns for the coming few years.
The fall in the markets was sharp and it is in past. However, remember that uncertainty still surrounds us. Existing investors who have already put their money in equities would have seen their portfolios take a beating. Here is what you can do now...
If there is the one thing you should not do – it is Panic. A lot of investors panic when they see their portfolio falling very sharply. And in this panic and fear, they make the most common and stupid mistake. They sell their investments at a huge loss. Remember, that a loss in equities is just notional till you actually sell at lower prices. Further, since these are temporary situations which we all know will soon come to an end, then why panic and sell? The businesses are as good as they were before? Has anything key parameter changed? No.
Let us take an example. Due to coronavirus, a lot of hotels have stopped getting reservations including say Taj Hotels. Due to this, the stock prices have corrected by say nearly 25%. The cost of our Taj hotel is say, Rs.1,000 crores. Will the hotel be now available at Rs.750 cores with a discount of Rs.250 crores? What would you do if you were the owner of the hotel and also as a buyer with Rs. 750 crores? Think on this and reflect as to how one generally behaves with listed equities on exchanges which are very easy to buy and sell.
If you haven't invested in equities or have been waiting for the opportune time to enter the markets, then the grand bus has arrived at your doorstep. This is perhaps the ideal time when fresh investments can be made into equities. However, we caution that there is still uncertainty and equity still carries the same risk as an asset class. What we can recommend is that adopt a staggered investment approach and spread your investments over a period of time. No one can catch a falling knife. No one can predict the exact market movements and the market bottoms. What you can do though is to buy on every dip and avoid putting all your cash at one go. Remember, cash is king in this market and you have to make smart choices in this volatile market.
What we have witnessed so far has been really astonishing for any student of equity markets. These are the times which will be spoken off in years to come. It is also a humble reminder to us that equities are volatile and anything can happen in the short run. And it is a fact that this too will pass. As a investor, one should know the nature of equity, not panic but make adjustments to our portfolio as per our risk profile. It is time to get in touch with your financial advisor and ask how you can take advantage of this volatility and increase your equity allocation. It is also time to be safe, avoid unnecessary travels, maintain proper hygiene and avoid group participation to fight against coronavirus. We all will have to weather this out as one nation, one community and one family.