IS THE WORLD COMING TO AN END?

While typically a title such as this would be considered too sensationalist or clickbait, these are certainly unprecedented times, to say the least.

We are looking at prospects of a contagion of Hollywood proportions, the markets are crashing, everything is getting cancelled, borders are getting closed and everyone is getting quarantined.

More than Corona Virus itself, FEAR is wreaking havoc in the world. And if you go by social media, the world is coming to an end and we need to act now.

As it happens with all market reactions to such events, leverage of the participants exacerbates the fall and converts the downward movement to an outright crash.

What is different this time around, from a 1987 Black Monday, and the 2008 crisis, is that the fall seems to be continuous with no end in sight. No amount of government intervention, whether it be announcements or monetary and fiscal stimuli, is helping ease the concerns. It is worse than financial crises or war or other man-made events, as those are still considered addressable by human intervention while the Corona Virus Pandemic is running its own course and spreading fast.

What should one do then, insofar as the financial markets are concerned?

First and foremost, one has to strip out the emotional elements from the decision making and look at the situation without the colour of FEAR.

Certainly, if you are leveraged, then you will be feeling the pressure and will probably capitulate to the high volatility of the market. There is nothing much to be done in such cases as the decision has already been made for you.

For those of us who aren’t leveraged, the key considerations to be kept in focus while making investment decisions are –

1. The Corona Virus is not as bad as it’s being made out to be. The mortality rate of Corona Virus is less than 3% and it is not a contagion such as those shown in Hollywood movies. So, there is no need to draw parallels of this Virus with end of the world phenomena. For that matter each year Dengue kills more people. It occurs every year, shows no signs of abating, and the mosquitoes transmitting it cannot be quarantined. There is no cure for Dengue nor is there any vaccine. But there will be a vaccine for Corona down the line. The only unique aspect of Corona Virus is its rate of spread which is the primary driver for the panic. To rationalize this panic, one should play out the worst case scenario. What if everyone gets infected? It will wipe out 3% of the world’s population! The rest will recover. We will emerge from a carnage. Yet 97% of the world’s population will be alive and well. There wouldn’t have been any physical destruction in the world similar to Thanos snapping his fingers and bringing airplanes crashing to the ground with 50% of the world’s population wiped out. 97% of the population will be around with all the companies and the physical infrastructure of the world intact. The machine of the world will be intact and would not have stopped.
2. The impact of the Corona Virus on the Economies. Yes, there will be a major impact of the Virus on the economies of the world. With cancellation of events such as major world conferences, sports events and even possibly the Olympics, moratorium on business travel, travel and hospitality sector will come to its knees. With the closure of malls, cinemas and prohibition of large public gatherings, consumption and retail sectors will take it on the chin. There will be tremendous earnings compression and GDP hit. But it will be transient. It is a billion dollar question how long it will last, whether one quarter or two or three or four. But once it is all said and done, with most of the world’s population intact and sentiment revival, all of these sectors, as well as growth, will bounce back. In fact with a greater momentum than before. The economies and financial markets will also bounce back with lower interest rates and greater liquidity being infused by the market regulators. The basic premise of consumption and the consumers will remain intact and once the earnings revive, there will be a multiplier effect on growth especially with the low base of the preceding quarters.
3. Stock prices have fallen off the cliff. Suddenly we are seeing asset classes trading at a discount of as much as 30% or more to their recent prices. Whether it be commodities such as crude oil, or equities. At any level one goes long, one finds the stock further hammered the very next day. Is it time to book out and sit on cash in view of the doomsday perspective? Or is it time to buy more?

The fact of the matter is that stocks which were being bought till a few days back on the premise of their earning trajectory, are now available at a much lower valuation. While the earnings of many of these companies will be hit in the current as well as ensuing quarters, the main question to ask is whether the company is in such a business that would see its business permanently impaired due to the current events, or whether the company is so levered or exposed to the markets that its solvency would not hold few crippling quarters.

If a company, say Microsoft or Apple, is in a business which will regain momentum after the Corona Virus peaks out, then it is certainly a compelling buy at current valuations which are at a discount to its recent peak. If one year down, earnings start normalizing, the stock should surely re-rate to earlier valuation metrics.

If on the other hand the world does come to an end, then it wouldn’t matter whether you would have bought this stock or would have liquidated all and be sitting with your funds in a bank. You can pick which boat you want to be in of the two, just don’t be in the boat where you liquidate stocks and have your funds in another upcoming YES BANK.

And regardless of what you do decide to do, keep washing your hands!!!

© Anshuman Khanna 2020

Published on www.anshumankhanna.in