No point in banning short sale or stock exchange shutdown

We are going through a rough phase. Markets are witnessing an unprecedented sell-off owing to growing fears of economic slowdown due to coronavirus (Covid-19) pandemic. The Nifty has already corrected over 30 per cent in less than 15 days and may slide further. Unless there is some clarity over the virus outbreak and the magnitude of its impact on the economy - both globally as well as domestically - forecasting could be hazardous.

That said, I don't think shutting stock exchanges or a trading halt will help in any way. Currently, the market tumbles 3 per cent - 5 per cent every day. There is no guarantee that if we stop trading for a few days, the market will not slide further. It can resume correction - and perhaps even a sharper fall may ensue. Prices have to arrive at an equilibrium through supply and demand as artificially creating a floor will be detrimental to the cause. Similarly, banning short selling also doesn't seem to solve any problem. Short-sellers organically reduce volatility in the markets as they book profits when markets slip, leading to some form of buying in a falling market.

Amid the current meltdown and panic selling, retail investors have shown immense maturity. They have started buying stocks, which is a wise decision. My suggestion to them is do not invest in leveraged companies and buy stocks of companies with sound businesses and strong management. No one can really call a floor to the markets, but starting to buy right now with a five-year outlook is advised. 

Retail investors should stay away from any kind of leverage and ensure they hold at least 25 per cent cash in their portfolios to buy more if the markets were to correct a further 10 per cent. True Beacon, our flagship fund, has significantly outperformed the market benchmark and our peers due to our propriety strategy. Volatility for all-weather funds like ours has been an opportunity.  

The economic fallout of Covid-19 is yet to be analysed but it will have a significant impact on India Inc's earnings in the March quarter as well as in financial year 2020-21 (FY21). However, the impact will vary for different companies. For example, airline companies such as IndiGo and SpiceJet are expected to post disappointing numbers as many countries have advised their citizens not to travel and some of them have ordered a complete lockdown to contain the spread of the virus. Other companies, including consumption, will show an impact in the subsequent quarters. 

Overall, we believe FY21 earnings will be impacted by 15-20 per cent due to Covid-19 outbreak. That’s just an estimate though, if we fall on the lines of some European countries which are predicting that 70 per cent of their countries might get infected, the impact could be significantly larger.

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Nikhil Kamath is co-founder and chief investment officer (CIO) at True Beacon and Zerodha

(As told to Swati Verma)