Two Important Questions of Equity Investor in the Covid Crisis

By Alpha Research

Two Important Questions of Equity Investor in the Covid Crisis – Answered

Jul 19, 2020

Everyone is going through a different journey in this pandemic. Many are under the trap of Covid Virus and many more are trapped under the side effects of Covid.

Salaries have either gone for a toss or have reduced. Businessmen are severely affected because they carry the responsibility of many other people working for their factories/organisations. Paying salary from the savings without any inflow is like cutting a heart. I wonder how long will they continue to bleed. I pray for everyones well being and fast recovery from this mayhem.

Some concerns which investors have shown during this crisis are very genuine and accordingly its important to make best efforts to guide the investor to take right steps. Therefore, I have tried to pen down the two repeated questions which I have faced lately and have tried to judiciously answer them here.

1) Why didn’t we come out of equity market before the Covid crisis? Why didn’t research team pick up this crisis in advance?

From the above question, we can easily sense that the query is related to the timing of market. Entering at bottom and exiting at top is a mission which investors always want us to perform. But its very difficult to perfectly time. I would like to state this as a MISSION IMPOSSIBLE. This is because, advisor being human being take decisions on the basis of available information, research and from his past experience.

The reason why we couldn’t perfectly time the exit before the Covid crisis is as under:

a) The receipt of information about Covid from World Health Organization was vague. In early days, WHO communicated that Covid virus was from the family of SARS, Ebola etc. and hence was not so contagious & fatal.

b) Information from the birthplace of COVID i.e. China was improper and incomplete. They were hiding the actual infections and death toll. We all know that China is a black box as far as information is concerned. The same can be related with the fact that till now they have not declared the number of Chinese army personnel who died recently in Galwan valley clash with India.

Due to above stated reasons, we couldn’t manage to exit equity market before the Covid crisis. Even the biggest of investors like Warren Buffet, Ray Dalio, Howard Marks, Rakesh Jhunjhunwala etc. couldn’t exit the equity before coronavirus crisis.

2) What is the future prospect of recovery and what strategy one should play at this juncture?

Out of 15k level correction in Sensex, 11k level has already been recovered which is 73% of recovery from the peak of 41k level. Although strength of infectious people and deaths are increasing, but still market is recovering at a good pace.

This is majorly due to global liquidity, opening of lockdowns and acceptance of new normal by adaptable humans. This fast recovery clearly shows that no one can time the market and forecast its movement perfectly.

Investors waiting for deep bottom in the market are still waiting and has lost major upside. Therefore rather than making any financial decisions on the basis of hunches, investor must stick to strategies that have been created after research, thinking and thorough planning, which are as follows: –

a) Stock market has seen several corrections like this in the past and eventually it has always recovered. The same can be seen in below chart. So it is certain that market would eventually recover.

b) After the crisis, equity market always recovers to a new high level i.e. it breaches the previous high level to touch new peak. Economy readjusts itself to a new and growth supporting reality where interest rates are low, oil prices are subdued, rupee is weakened which supports export, business models are new & evolved etc. Once economy starts moving again, big investors like FIIs deploy more than what they had taken out at the time of downturn. For example, in 2008 crisis, FIIs sold $12 Bn in India and while recovery they deployed $43 Bn.

c) Reallocation strategy provides extra edge over Rebalancing strategy. Under reallocation strategy, investor increases or decreases the equity allocation after inculcating the valuation and outlook of equity market. This strategy directs investor to deploy more money in equity when market is low and at an attractive valuation.

Investors will always crave for a magical solution of timing the market perfectly but real strategies to be implemented are as follows: