Coronavirus impact: Investors can buy good stocks but in limited quantities

With the Sensex crashing as much as 1,448 points on Friday despite aggressive buying by domestic institutional investors (net Rs 7,600 crore), stock markets are likely to be on the tenterhooks for some time
On Monday, the market might open with a gap up (at a higher level) because there was aggressive selling before closing on Friday. But investors should not feel that the worst is over. There could be some more pain before things get better,” says investment advisor Arun Kejriwal, summing up the market mood.

With the Sensex crashing as much as 1,448 points on Friday despite aggressive buying by domestic institutional investors (net Rs 7,600 crore), stock markets are likely to be on the tenterhooks for some time. Over the week, the BSE Sensitive Index, or Sensex, lost a cumulative 7 per cent, wiping out Rs 12 trillion worth of investor wealth. And there could be some more days of uncertainty, or even sharp falls.

More trouble ahead… Initially, the consensus view was that the outbreak would remain confined to China. "It is the spread of the virus beyond China to several parts of the world that has spooked investors," says Radhika Gupta, chief executive officer, Edelweiss Mutual Fund. According to reports, people in at least 53 countries have been infected by the virus. The bullish scenario, according to a note from Validus Wealth, is that the epidemic remains short and manageable. In a bearish scenario, if the Covid-19 comes under control only after six months or longer, then that could cause a material shift in developed market consumer and corporate behaviour. “There is a fear that if the epidemic persists, and is widespread, then global GDP growth could take a significant hit in the first half of this calendar year,” says Jinesh Gopani, head of equity, Axis Mutual Fund. On Saturday, China’s Manufacturing Purchasing Managers’ Index (PMI) fell to 35.7 in February from 50 in the previous month — worse than 2008. The non-manufacturing PMI fell to 29.6 — a historic low.  

If a general risk-off atmosphere prevails, then the Indian markets will be impacted. As foreign institutional investors (FIIs) pull funds out of emerging markets and move them to other havens, the Indian market, too, will have to bear the brunt. At the ground level, many Indian companies import raw materials and semi-finished goods from China, which they use as inputs in their manufacturing. If the supply of those goods gets disrupted, the earnings growth of such companies could be affected. "If the disruption in economic activity in China continues for a long time, then the earnings of many companies that are dependent on Chinese imports could be affected," says Gopani. The expected rebound in earnings in the fourth quarter of this fiscal year could get further delayed.

…however, mayhem may not last long: Data shows that the impact of such outbreaks on the Indian stock market has not lasted for too long. And other domestic factors such as the economy come into play soon enough. For example: While the outbreak of H1NI did pull down the Sensex by 13 per cent in the first month, it rebounded within the next few months. And in most of the other cases, markets did not react much. “There could be some more pain, but most of the impact seems to have been priced in,” adds Kejriwal. Of course, the Indian markets are facing domestic headwinds as well. The third quarter gross domestic product rose by just 4.7 per cent – the lowest in seven years.  

Sectors that may take a hit: Consumer durables companies import parts like compressors for air conditioners and refrigerators from China. While they have adequate inventory for now, they could run out of them if supplies do not resume within the next 10-15 days. Auto ancillary manufacturers also import a lot of parts from China. Electronics goods, chemicals and the pharmaceutical industry are other major importers of raw materials and inputs from China. All of them could be affected if the epidemic is not contained soon. With many companies permitting only essential travel, the travel and tourism industry worldwide, and in India, is expected to be hit.

Be conservative even with good opportunities: Of course, there will be many. But don’t go all out immediately as there could be more correction. Kejriwal says that investors can buy good stocks but in limited quantities. More importantly, don’t lose your nerve. “ Our study of past episodes, such as the SARS epidemic, has shown that panic caused by such an event can result in a sharp correction in the markets. But when the concern eventually fades, the bounce back can also be rapid,” says Gupta. In a long-term investor's journey such episodes often appear as mere blips in hindsight.

These events also throw up buying opportunities which the diligent stock investors can benefit from. "Many investors would have done their due diligence and prepared a list of stocks they would like to invest in, along with the price at which they would like to buy them. If the ongoing correction brings the prices of those stocks within the desirable range, they should snap them up," says Ankur Maheshwari, chief executive officer, Equirus Wealth Management.

Experts suggest that investors should deploy their surplus money in a staggered manner during such a sharp correction. Avoid investing all your money at one go, as further corrections could create more attractive buying opportunities. At the same time, do not wait on the side line and try to guess the market bottom. This is almost impossible to pull off. If the market rebounds, you could lose out on good buying opportunities. Also, do not expect quick gains. “Gains are more likely if you invest in a staggered manner with a three-five-year horizon,” says Gopani.

Mutual fund investors should keep their systematic investment plans (SIPs) for their long-term goals going. At the same time, if they have surplus money, they should check their current asset allocation, which may have got disturbed. The recent gains in mid- and small-cap funds have been wiped out by the ongoing correction. 

Episodes like these also underline the importance of having a diversified portfolio. Gold, the safe-haven investment, has benefited from this crisis. It is up 1.6 per cent over the past week and 4.69 per cent over the past month. If your portfolio does not yet have a 10-15 per cent allocation to the yellow metal, think of investing in sovereign gold bonds (if you have an eight-year horizon) or gold exchange-traded funds (if you desire liquidity). Develop your allocation to gold in a staggered manner.

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