It is a popular saying that stocks take downward elevator during a crash, and then take stairs on the way up. But what we just saw in last 2 months is that Sensex is travelling downward and upward by Elevator only. The crash was so significant as if there is no tomorrow. The rise again has been so steep as if there is no damage due to Covid19 at all. There have already been behavioural casualties. I came to know some stories where some investors sold off their entire holding at 27000 (Sensex) level, thus booking a 45% loss from peak. No one in sane mind should do that, but sanity is the first victim of stock market crash. It is never easy to handle the stock market pressure during such times.
In this note, let me try to address some queries about the investment strategy way forward:
- When do we see normalcy return?
- Go into the market at current levels or wait for better opportunities?
- If the Sensex rises, shall we exit and wait for lower levels?
- Should we focus on index or multi cap funds?
- Should we consider Gold & Pharma?
- Shall we be concerned about debt environment deterioration, and reshuffle debt holdings?
Here are my comments:
- When do we see normalcy return?
Disease: COVID19 is still being a mystery at large. World’s best scientists and pharma companies are trying to decipher the ways to contain it. While most of the countries around the world have adopted the strategy of locking down the movement of their residents, countries like Sweden and Turkey have adopted a more liberal approach. They are hoping to achieve herd immunity overtime without causing much damage to the respective economies. Only time will tell when & how Covid19 spread gets contained. Some countries are showing promising signs though. However, resurgence of the virus spread remains a threat.
Economy: The economic lockdowns cannot go on forever. We are likely to see gradual opening up of economies soon. Else, the lockdown shall cause more harm than the virus itself. I would consider next 2-3 months as the period of revival across all economic sectors.
Stock Market: The current lockdown has seriously dented the balance sheets of companies and countries. There are going to be implications on employment and earnings. The consumption shall not bounce back to pre-COVID level in a hurry. According to me, it shall be considered normal once SENSEX has scaled back to 42000 level. This may take a year or two.
- Go into the market at current levels or wait for better opportunities
Experts are divided on this. All lessons from past crashes suggest that the stock market pain is not over yet. The recent climb in the stock market is a trap to entice investors back into the buying stock as it helps those who wish to exit at current or higher levels. As per Mark Mobius, the paid piper of Emerging Markets, the probability of double bottom is very high. On the contrary, most MF fund managers are aggressively buying in the current markets. All the fund manager concalls suggest that albeit there can be deeper downside, it shall be difficult to time. At current levels, Sensex is still 35% away from the peak. That is a good return to have on fresh investments over next 1 to 2 years horizon. So, investors should look at their risk appetite and accordingly take the plunge. Some investors may be going through FOMO (Fear of missing out). They should not yield to their fear or greed.
- If the Sensex rises, shall we exit and wait for lower levels
The sudden & unexpected rise in stock market is raising concerns about the sustainability of the current levels. Some investors are contemplating to exit if the Sensex continues to rise at the same pace for next few session. According to them, they will find better levels to enter once the market corrects. My recommendation is to strictly follow asset allocation model. Don’t be speculative in the current market. Exiting at higher levels can be easy. But entering at lower levels may prove to be difficult as the fear would be much higher then.
- Should we focus on index or multi cap funds?
Although Index funds had performed better than multi cap funds over last 2 years, the tide seems to be turning in favor of multi cap funds. One can say that the Value buying is back in vogue, while Momentum stocks are taking a hit. Accordingly, over last 15 days, the index return is 14.50%, the actively managed multi cap funds have delivered around average 17.30% . In comparison, momentum stocks have delivered 9.28% during the same period.
- Should we consider Gold & Pharma
Both Gold and Pharma are well suited under the current conditions. With the world under massive liquidity easing, the currencies (including USD) will come under pressure. Under such scenario, Gold outperforms.
The Pharma sector has seen traction after nearly 6 years of battering. Sometime in 2019, the sectors corporate earning had started to improve. The valuations had come to 2009 levels even before Covid crash happened. The current pandemic has brought global focus on healthcare. Pharma & Healthcare companies should be direct beneficiary on sustainable basis, going forward.
- Shall we be concerned about debt environment deterioration, and reshuffle debt holdings.
No doubt. You should consider taking a look at quality of your debt portfolio. Although RBI is taking a lot of preventive measure, I am of the opinion that some defaults in debt market over next 1 year may actually happen. Credit rating agencies will have to downgrade few securities due to lockdown pressure, eventually after the moratorium is lifted. Therefore, stay with quality paper and stay safe in debt schemes.
