The Virus has hacked the Market – How to debug?

Global & Indian equity markets have been hijacked by the Corona virus fears.What exactly is happening?

It’s a public health pandemic which has originated in China and got spread all over the world by carriers and infected people who would have travelled there or come in contact with an infected person.

While the medical fraternity is gearing up to fight the pandemic (God bless them!),the effect on financial markets is quite catastrophic.

The Dow Jones has seen the steepest fall of over 30% in a month since 1987. The Federal Reserve, (the central bank of the USA) is trying its best to calm markets and stop its fall. Global recession is a given, which they are trying to stave off.

Indian equity markets (Nifty has fallen by 26%), Gold, Oil,are all tanking.

The question is why such a reaction?

Panic in the Citizens – As deaths due to the virus are increasing as well as the news that its highly infectious,citizens are panicking. The Public Health Personnel including WHO are rightly cautioning about the deadly virus and precautions which need to be taken.

We need leaders who take charge,leaders who comes out and announce that there is a pandemic, we are controlling the spread and that it will be managed. This would soothe and calm fears.Singapore & China have shown this kind of leadership.Social media is adding fuel to the panic fire.

Panic in the Markets – The question is that if there is a virus that is a health hazard why are the financial markets tanking this much?

The aftermath of virus in China was a total shutdown for 2-3 weeks. Post that there was a travel ban that has been imposed by various countries in the world. Europe has completely lost control over the situation due to complacency and weak response.

China is the biggest supplier of goods to the world. A lot of raw materials are also sourced via China. It is also a big market for goods and services sourced from all over the world.Now with the China shutdown,half the world shut down,the financial loss is something the market cannot fathom. Markets hate confusion and uncertainty.

It is also not known how much time it will take to find a cure and a vaccine.

So the uncertainty is eating up the markets and equity fund managers especially the foreign institutional investors. They are very very large investors and when they decide to sell they just exit without seeing the price.

The market is therefore seeing a huge sell-off.

Certain industries like Airline, travel, leisure, hospitality will be impacted very adversely to the point of bankruptcy. All their employees, vendors will see a reduction in their purchasing power.

This is a vicious cycle which results in recession and decrease in profits of companies. Companies with weaker financials will see a reduction in profits which in turn will result in lower share prices. So the selloff.

In the last few years algorithms have taken over trading in the markets. A software decides the buy and sell orders and execute them at a lightning speed.

Algo’s are emotionless and they can sell relentlessly without having any regard for the loss which is getting booked. My belief is,that is the reason that Dow Jones has hit lower circuit this quickly three times this month.

What is happening to Gold?

Gold had a good run and now the price of gold also falling silver at multi year lows. Gold is supposed to be a safe haven then why is it falling? One theory is that big investors are making a loss everywhere so they are booking profits in gold. Also speculators who had bought gold to sell at a profit are also selling.

What is happening to Oil?

Russia and OPEC (Organization of petroleum exporting countries) are major producers of oil. With a global slowdown imminent, naturally oil demand will be impacted. Russia and OPEC get together and decide to reduce production to hold up the price.

Russia has not agreed to cut production, so the world will have a glut of oil so prices are tanking. It’s not easy to produce and store oil and if factories don’t need it, trains don’t run, flights are grounded then less oil will be required.

India is a beneficiary as we import our most of oil requirement.

But there are so many countries who depend solely on oil exports. They and their companies may go bankrupt. They may not be able to honor their debts. Banks who have lent to them can go bust. There is an intricate web of interdependence in the financial markets and if one big chunk fails it can all fall like dominoes.

Well this is the gloomy picture which financial markets are facing. It’s like the bubonic plague plus world war all at once,all highlighted in slow motion by social media. Which is the reason markets are selling off like there is no tomorrow.

But,

The selloff has to stop sometime. Otherwise market will fall everyday 10%everyday and in 10 days its game over as Sensex and Nifty both will become zero by then.

So what the verdict?

While no one knows what is going to happen.

Here are my beliefs.

I think that there is reason to be worried and scared for the health of our own, family and friends. The disease is highly infectious and can prove to be fatal as a cure is still far away. We can still be calm and go about our work in a sensible way. If social isolation is the cure, let us isolate.

Iam not of the belief that the world will end with coronavirus.

For once our government is being proactive and kudos to them and so are the citizens. They are also being careful and obedient and are following instructions.

It will be painful and slow recovery. But this too shall pass just as the other crises in our lives.

When will the market recover? Will it be a long drawn slowdown? Will it be a V shape recovery or a U shaped one?

Will the government bailout hard-hit industries? Will it act swiftly and stage a smart recovery or will be slow in their response?

These questions have no answers as yet.

I am keeping the faith and not looking at the destruction in my portfolio and buying a little equity at every downturn.

I have faith in humanity, in Indian markets, Indian medical professionals, and Indian entrepreneurs to be resilient and to eventually conquer the virus.

So I am buying.

But I am only buying equities which I can hold at least for 3 to 5 years. Iam investing only that much surplus which I can afford to invest and not look at it for a while. If the value of this new portfolio goes down I will not get disheartened and upset.

So buy but only as much as you are comfortable. In this market free cash and holding capacity is a superpower.

Now what am I buying?

THIS IS NOT A RECOMMENDATION.

Iam buying frontline large cap stocks which I can hold forever. Strong companies with great business and a professional management which will recover fastest after the crises is over.

Nifty ETF is my biggest buy.

Keeping fingers crossed & hope that God bless us all.