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Current Market Conditions and Suggested Course of Action

By Nivesh Gyan   21 March

Category: General

Globally the markets have been extremely volatile due to uncertainty created by the issue of Covid-19. Various countries have imposed lockdowns impacting businesses. Such lockdowns are unprecedented. Crash in oil prices (declined by almost 50%) has added to problems of large economies like the US. There is expectation that some countries may go into recession impacting global demand. Here is a brief analysis of different asset classes and our suggested approach.

Equity Market

  • The current uncertainty will continue to keep markets volatile. Recovery will depend on how and when the situation on Covid-19 front is controlled. If the situation is controlled in next 2-3 weeks, then we can sharper recovery. On the other hand, if the situation goes out of control, then we can see more correction, and recovery may take longer – upto 12 to 18 months. It is impossible for anyone to predict the short term direction.
  • The correction has made the overall market attractive especially in the large-cap which was trading at a very high valuation in last month. 
  • In the last 100 year, if we look at the history of other pandemics, it could not be sustained for more than 1 year in any case whether it is, SARS, EBOLA, Swine Flue, etc. Markets tend to recover well once the panic is over and situation becomes clearer. 
  • The situation for Indian economy looks positive post the situation becomes better
     

    • India is not extremely integrated with world markets and there is large domestic demand
    • Global companies will look at India as alternate sourcing hub. Indian companies will also give preference to local manufacturing.
    • Reduction in oil prices will help fiscal situation of government.

Suggested course of action

 

This is an unprecedented situation but we all know that no problem in the world is forever. Every problem is temporary and this situation will also pass eventually. In such a situation where everyone is scared, it is a better time for your investment.

 

As per Warren Buffet “Buy when Everyone fearful”

 

  • Iit is the right time to increase your exposure in equity through SIP keeping at least one year in mind. One can choose large-cap funds, as large-caps have lower risk and they recover ahead of mid-caps and small-caps.
  • Do not put lumpsum in equity rather go through weekly STP route 
  • Do not try to time the market because no one can catch the exact bottom 
  • Do not redeem your existing funds and stop your SIP just to catch the lower prices. However, if there is panic, then one can use any recovery in the market to exit the lumpsum in the portfolio but must continue SIPs.

Debt Market

  • The debt market has also been affected by all-round selling in the market, particularly by large investors, including FIIs, to meet margin calls as their trading positions got hugely impacted. There is a gap in the demand and supply of bonds.
  • This has resulted in sharp increase in yields and decline in prices of bonds. Accordingly, NAVs have declined leading to negative short term returns.
  • Its a normal thing and it usually happens during these panic situations
  • It will recover very sharply once the things get normalized
  • Higher bond yields, coupled with expectation of rate cuts, presents excellent opportunity for investments in quality debt funds.

Suggested course of action

 

  • It is a perfrect time to take exposure in debt funds with high quality papers with minimum 6 months perspective. Don’t be bothered if you witness some volatility in the meantime. One can expect returns in the range of 8-10% return over next one year given current yields.

Arbitrage Funds

  • Arbitrage opportunities have reduced as futures are trading at a discount. And the situation may continue so for next 2-3 months. So these funds may not give any return from hereon. However, we do not anticipate risk to capital.

Suggested course of action

 

  • Arbitrage funds can be moved into overnight funds, if these were to be held for short duration. If these were to be held for long duration, then money can go into quality debt funds.

Gold

  • The all-round selling in anticipation of more liquidity has led to a decline in the prices of gold which had reached the level of Rs. 45,000
  • Gold is very favorable for investment in the current situation as it is treated as safe haven 
  • Gold is negatively correlated to equities. It performs exceptionally well during stock market crashes.

Suggested course of action

 

  • One can invest lumpsum or initiate SIPs

Corporate FDs

  • One can opt for FDs of quality housing finance companies like PNB Housing Finance and HDFC Ltd. Their rates are higher than rates of banks and credit quality is good. As interest rates are likely to be reduced further, one can invest now to lock-in higher rates for next 2-3 years.

P2P Lending

  • Avoid large exposure to P2P at the moment, as small businesses may face problems due to current economic conditions.