Global markets have been roiled with a spell of extreme volatility – most of it in the downward direction – following the rapid global spread of the coronavirus (COVID-19). Though the virus is not as deadly as its recent predecessors – SARS and MERS, it appears to be extremely contagious, and people are bracing themselves for its appearance in the neighbourhood, and among acquaintances.
The only surprise about the market’s reaction was that it took a few weeks for stock prices to go into free-fall. And it will also be very difficult for the existence of the virus to be normalised – as is the case with other common bugs that have been around for ages.
People’s personal fears aside, the market would eventually return to reacting to its normal drivers – economic activity and liquidity. The latter has been plentiful in recent years with central banks intentionally, or otherwise, ensuring that there is enough money chasing stocks – whether or not fundamentals justify the valuations. And they have immediately gotten into the act, with the US Federal Reserve (US Fed) cutting rates unexpectedly by half a percent following the recent sell-off.
There is no doubt that the virus is going to affect the economy of all countries – and not just by supply chain disruptions, but also through a drop in demand for services that involve a gathering of people – and there are a large number of these. Demand would also drop because of declining business and consumer confidence. Most economists are expecting a recession in the US and elsewhere.
This brings us to an important question. What is a good investment strategy amid this health scare? Devising an investment strategy in the middle of all this disquiet is a challenge. The key factor which might limit the market’s downside is similar (if not coordinated) action by most countries to contain the spread of the virus. Central banks will also be thinking on similar lines, and further rate cuts are a given.
How the virus unfolds globally is still an unknown, and every time some significant number is crossed there would be more panic for the markets. Market risk, therefore, remains very high. Fortunately, this decline has not started from an outright bubble like those of 2000 and 2008, and the markets may not be heading for a bottomless pit.
Nevertheless, there is certainly a case for investors with a large exposure to equity (compared to cash assets) to cut their exposure incrementally. They can always re-enter the market once the situation is less uncertain. Cutting exposure could lead to an opportunity loss should a treatment for the virus abruptly emerge, but it would be better to err on the side of caution.
There is an opposite case for investors who are sitting on cash, having decided that the market was too expensive independent of the virus. Anyone who has done that probably has a pre-defined entry strategy, and does not need any additional advice.
We also have the class of investors who like to buy into a panic. This is certainly a panic situation, so incremental purchases may be justified, though not a shopping spree because of the uncertainty that lies ahead.
There is no reason for SIP (Systematic Investment Plan) investors to do anything different, because that would be going against the very basis for following such a plan.
Among the class of stocks to invest in, pharmaceuticals and consumer goods would seem safer options as almost all other industries would see a drop in demand. Even gold may not be the usual safe haven, as over 50 per cent of the global demand is by way of jewellery, which would be hit if there is a lack of consumer confidence.
Finally, the section of the market which should be least affected by the virus are short-term and day-traders, as they are not really concerned about the longer-term market trend, and should welcome the volatility - at least when they get the direction of their trades right.
Disclaimer: Deepak Mohoni, founder, trendwatchindia.com. Views are personal.