Firstly and most importantly we hope that you and your family are safe.
Now to the financial markets.
Is this over? No idea. Is this worse than previous sell-offs? Not sure but comparisons with previous crises’ don’t tend to matter so much in the midst of a crisis. They provide statistical reassurance once you are through the crisis.
For now, we need to weigh up what will likely cause the markets to turn around.
- A vaccine? Research teams around the world are coordinating and working round the clock for a solution
- Another 20 percent decline in the market? We are already getting in value territory of stock prices. Would a further decline make them even cheaper for investors to get bullish?
- Perhaps a continued absence of cases in China coupled with a peak of cases in Europe/US?
The other thing to watch out for is the globally co-ordinated government action which has been massive. It is both monetary (reducing interest rates) and fiscal (trying to get $s in people’s pockets). Governments have been quick in recognizing the need to act fiscally which should not be underestimated in the longer run.
Now, some interesting market observations:
- Relative Performance: The geographic distribution of cases has little to do with the performance of any country’s benchmarks. Every stock market is affected. YTD (19-Mar-2020) Sensex is down ~30% vs the SPX ~25%.
- Currency: The flight to USD as the safe-haven currency has had the USD strengthen significantly. USDINR is at 75 vs 71 at the start of the year ~ 5.6% stronger.
- Focus on Delivery: As cities and countries go into lockdown, people will opt for the delivery of most essential items. Thus, in anticipation on 16th March, Amazon (AMZN) said it is hiring 100,000 extra staff and raise hourly wages to keep pace with coronavirus demand.
- Cash is king: Even as their stock prices tumble, fundamentally strong businesses are likely to bounce-back quicker. Companies with strong balance sheets can tide over working capital constraints as well as acquire others cheaply. Banks will also lean towards financing them over others in their flight to quality. Apple (AAPL) has nearly $100bn cash on its balance sheets, while Berkshire Hathaway has over $128 bn in cash.
- Even other developed market currencies have suffered: GBPINR is at 88 vs 94.5 ~ 7% weaker. This can be a unique opportunity to scout for deals in these markets as well.
- Central banks are slowly running out of ammunition: Rates are at near 0% in the US and UK and negative in Europe. This also poses significant pressure in the Banks, who will suffer tightening net interest margins. The incentive to provide credit will thus reduce, which can lead to a spiral.
- Gold prices are behaving awkwardly: A significant drop in the equity markets usually has Gold rally. Gold price (GLD) is largely unchanged on the year in USD terms. This is still early days in understanding the impact of Central bank’s measures. If they reach a point where there may be little additional impact from their policy, one may see Gold rally against the USD..
- Fear and Uncertainty are well reflected in the markets.: The index that measures the volatility of the S&P 500, the VIX ( a measure of market fear and uncertainty) is at its highest levels. These are choppy waters. For a novice investor, this is a time to prepare. For a seasoned one, it’s a time to hunt.
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So, (and please note that this piece is an opinion and does not constitute investment advice) how do we think about investing in these turbulent times:
- Don’t go in too early. Thankfully we are past that stage. But even now it may not be the best idea to invest your full allocation in one go.
- Be patient and average in. The market is illiquid and moving around in huge intra-day ranges. Timing it is difficult and the defense against it is averaging in.
- Companies with lower relative fixed costs will outperform their competitors. Big tech companies are likely to come out in strong positions after this crisis, possibly gaining market share against their competition.
- In a world where money is being printed to solve a crisis, consider safe-haven assets such as GOLD (GLD). It has traditionally served as an efficient inflation hedge.
- People are likely to tighten their belts in trying times. Consumer staples should outperform consumer discretionary names.
- If you are invested in US stocks, the relative stock market performance and the strength of the USD provided portfolio diversification protection this year. In essence, global diversification still worked.
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Finally, we want to emphasise the importance of following government health advice to keep us all safe and in getting us all through this challenge.
Stay safe and healthy!
P.S. Netflix Recommendations from the Winvesta team:
- Lakshya
- Money Heist
- Stranger Things
- Peaky Blinders
- Fauda
- Our Planet
- Taare Zameen Par
- Andaz Apna Apna