As India grinds to a halt, there’s an increasing sense of fear all around about COVID 19’s implications for our safety, the economy and the markets.

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Increasing fear of the unknown has led to a stampede for safe-haven assets such as fixed income. This has pushed the valuations of strong companies to the lowest levels we have seen in 15 years.

It is true that we expect some more short-term trouble, however, to a large extent, if not fully, the risk of the Covid 19 pandemic is already reflected in today’s market prices.

After the 2008 global financial crisis recovery was slow and protracted due to deep structural and systematic failings.

Covid 19 hits confidence, supply and demand only on a temporary basis. Through a combination of social distancing (as the Chinese have successfully shown) and medical solutions (within 12 to 18 months) the road to recovery is clear.

That brings us to the obvious question, i.e. if things are going to be okay in a year or so, why is the market collapsing as if the future will be bleak for a very long time?

There are three reasons that are driving this short-term collapse

Increasing fear is a feeling but not a fact. But for a person who is unwilling or not attuned to refer to numerous similar events in history, the fear becomes a fact; his instinctive reaction then is to panic and sell.

Leveraged investors who are unable to meet margin calls are being force-liquidated. This category has both foreign hedge funds and domestic traders who were using derivatives to carry exposures that are 5 to 10 times the size of their owned capital.

In 20 years, foreign investors in India have never sold as much in any single month as they have over the past 1 month they have sold about USD 15 billion (USD 8 Bn of equities and 7 Bn of bonds) Short sellers have taken advantage of investors’ panic to sell first and driven down prices so they can buy lower and make a profit.

To avoid falling prey to such forces, and rather to be opportunistic about their lack of patience, what is of paramount importance is to look beyond the next few months and keep our focus on the fact that normalcy will return in a few quarters and the fact that stock prices will once again reflect the quality of the businesses and earnings growth.

Perhaps the best evidence is to check what the promoters of India’s top firms have been doing with their own money during this panic.

From observing promoter activity since 23rd Feb (which is when the market began its steep fall) one gas has seen an aggressive spike in insider’s buying their own shares.

Some of these include management of Tata Steel, Mind Tree, Bajaj Finance, Tata Motors, Bajaj Auto, JSW Steel, Axis Bank, Indian Hotels, Bajaj Finserv, Godrej Agrovet, Future Retail, Maruti Suzuki, Godrej Industries. MRF, GE Shipping, Tata Power, Bajaj Holdings, & PVR

We remain confident about the medium term and future outlook for the markets ahead although there will be challenges in the short term with the markets likely to witness a time correction for some time before markets stabilize and move up again

As we write this note the markets have bounced back sharply which was on anticipated lines as markets were heavily oversold.

With China reporting virtually no new cases of Corona, we expect that the current 21 day lockdown period will be a good solution to get rid of this virus.

While this fact may lead to temporary distortion of overall GDP, and corporate performances for one or two quarters we believe that this fact is temporary and life will be back to normal soon but the short term pain will have to be borne to enjoy the fruits in the long term.

As an existing Advisory investor and valued client of ProfitMart Advisory, we strongly encourage you to hold on tight to your investments.

As always, we are investing in firms with little or no debt and earning a high return on equity.

We don’t hold cyclical commodity companies in our portfolios and instead focus on businesses that have structural growth potential.

We also would add that this is a very good opportunity to add to your equity investment, which we believe is a terrific time and will give a strong risk-reward over the long term.

Disclaimer –
This document is meant for the recipient only for use as intended and not for circulation. This document should not be reproduced or copied or made available to others. The information contained herein is from the public domain or sources believed to be reliable. While reasonable care has been taken to ensure that information given is at the time believed to be fair and correct and opinions based thereupon are reasonable, due to the very nature of research it cannot be warranted or represented that it is accurate or complete and it should not be relied upon as such. Also above note is not a recommendation to Buy or SELL and is only a view based on facts and figures and we will be in no way responsible for any losses incurred by anyone who uses this information to either trade or invests securities mentioned herein.