Hi friends! Hope you are having a good day.
Welcome to Angel One’s podcast.
The world is in the throes of a highly infectious disease, Covid-19, caused by a novel coronavirus. Faced with an unprecedented crisis, governments across the world have resorted to different levels of restrictions on mobility. The Indian government, too, announced a nationwide lockdown in March which has already been extended on two occasions.
Covid-19 pandemic and the lockdown has had a severe impact on the economy. Businesses have been shuttered, except essential ones, and people have been confined to their homes. However, it would be foolish to allow the overall gloominess to affect your investing decisions.
Life goals have to be met. Wealth has to be accumulated for future needs. A lot of money invested in the stock markets is for purposes like saving for retirement or children’s education. But capital markets have been severely roiled by the COVID-19-induced disruption. It has led to a dilemma for investors.
Should you invest in stocks right now or wait for the situation to normalise? We will try to answer the question in today’s podcast.
Stock markets are a reflection of the broader economy. Naturally, it would be wrong to expect that the stock markets will be completely insulated from the disruption in the broader economy.
The nationwide lockdown in India was announced when Covid-19 infection in the country was in three digits. The number of infected people has touched six digits, but the economy has still not been opened completely. Two months have already passed!
Both Sensex and Nifty had declined over 23% in March, reeling under the impact of an initial surge in Covis-19 cases. Foreign Institutional Investors had withdrawn a record Rs 65, 816 crores in the month. The severity of the meltdown can be gauged from the fact that circuit breakers were activated on two occasions and trading had to be halted.
These developments would make even the most bullish investors sceptical. You will, however, be surprised to know, both the benchmark indices rose over 25% from the March lows, in April. Even after the recovery rally in April, benchmark indices are trading 25% lower than the highs touched in the year.
The ground reality didn’t change much between April and March. In fact, April was more damaging for the economy due to the nationwide lockdown. But stock markets seem to be giving a contrasting signal.
Stock markets fell due to a knee-jerk reaction by investors. Recovered equally fast, even though there was no material change on the ground. Considering both the scenarios, it can be confidently concluded that the stock market will remain volatile in the near future.
Now the question arises, are you comfortable with volatility? The question is relevant only if you are a short term investor. The number of new demat and trading accounts being opened point towards the entry of a large number of new investors, just to gain from the record low prices.
Investing with a short term horizon in the current market is not advisable. The bounce back from March lows can be wrongly assumed to be a signal for recovery. Experts predict the market to move in a downward direction with added volatility.
Two major factors are cited for the forecast. First, there is no certainty on when the pandemic will be over. The second is a direct result of the first. If the trajectory of the infection cannot be predicted with certainty, it becomes nearly impossible to estimate the impact of the pandemic on the economy.
A clear picture of the impact will emerge only after all the restrictions are removed and the economy is completely opened up. Analysts will be able to correctly value stocks after normal operations resume.
Though the overall impact is not certain, it can be predicted that large companies will weather the storm more efficiently. With stronger balance sheets, better market presence and access to formal capital, it will be easier to recover from the disruption. In a nutshell, stick to large caps while investing during Covid-19.
A long term investment horizon and opting for large-cap stocks will provide a level of stability to your portfolio. Equity markets have witnessed similar crises in the past but have performed well in the long run. The Covid-19 crisis is no different. Even in normal times, stock markets go through boom and bust cycles.
I hope broad themes are clear. Now let us get into a little detail. Large-cap is a broad group, with multiple companies from different sectors. Every company is not adequately equipped to handle the crisis satisfactorily.
Here are some pointers to consider. Strong moat, strong cash flows, low debt or at least comfortably leveraged, and sustainable growth visibility. A sector-wise classification is also crucial.
Pharmaceuticals, diagnostic, FMCG, telecom and some other consumer-facing companies can be considered. But temporarily stay away from stocks that are dependent on discretionary spending.
Experts believe a clear picture of the level of consumer demand is likely to emerge by September-October.
Investing in stocks dependent on discretionary spending before that is not advisable.
Additionally, investing only in large-cap stocks may affect diversification. You can invest in large-cap and mid-cap stocks in an 80:20 ratio. Mid-cap stocks should be analysed on similar parameters like a business moat, cash flows, etc.
If you have made up your mind to invest, do not deploy all your funds at once. Since the markets are likely to be volatile and uncertainty will prevail for some time, opt for a graded entry.
Finalise the stocks and keep aside the total money you plan to invest.
Invest in tranches every week or every two weeks. The risk of entering the markets at short-term highs or lows can be mitigated by investing in tranches.
You can definitely invest in the stock markets during the Covid-19 pandemic, but not with goalposts set during normal times. Capital protection should be the priority right now. And don’t forget to maintain liquidity. Hold adequate cash!