Coronavirus 2 – Important to adhere to your asset allocation

Sanjiv Mehta  |  2020-03-16

It is officially a pandemic and future course and consequent impact on markets is still unknown. It is important to adhere to your asset allocation.

I had mentioned the importance of liquidity in my first article on 3rd March. I have always emphasized the sequential approach of allocation of assets in our portfolios. Liquidity gets the highest priority so that contingencies or crises similar to what we are facing now can be taken care of. Then there is safety part of the portfolio which does not get affected by the market fluctuations, for example our primary residence, it does not matter what it is valued on a daily basis. This will also include government bonds and saving schemes. Then only the money is allocated to high yielding but volatile asset classes so that we have the resilience and staying power so that we make an exit only at a good level.

The current status of Coronavirus is still uncertain. It is now in more than 100 countries. There is useful data from Johns Hopkins University on country wise cumulative number of cases and their daily growth rate since 100th case. Currently many European countries including Italy, Spain, UK and Germany are on the same high trajectory trendline of 33% daily increase. USA, Australia and Iran are also close to the same line. On the positive side, although it is only a small positive, South Korea, Singapore and Hong Kong have been able to go below this high growth line. India so far has contained it well, however, the real challenge is when the number of cases go above 100. Hopefully, a global coordinated response will start emerging and build upon the positive experiences. Already a worldwide ‘social distancing’ movement has started and numerous events of mass congregation have been cancelled.

Economic impact is proving to be severe as multiple activities and supply lines get disrupted. China might be reporting a very low 1% growth. Many western economies including the most important one of USA might tip into recession. Rate cuts will largely be ineffective since people still will not engage in activities. Only when people start seeing arrest or at least slowing of the disease progression, economic activity will show signs of revival.

Financial markets will therefore remain in a negative trend for the time being. Generally, the fear of anything and everything is exaggerated compared to the reality. In economic terms, markets tend to discount a very bleak future very soon and then they turn around. Of course, it is very difficult to forecast the magnitude of the current crisis and one should not underestimate it. However, past experiences of major crises including SARS in 2003 and CMO financial crisis in 2008, markets went down significantly and made remarkable recoveries thereafter since all the pent up demand and emotions got released.

Hopefully, various countries will start emulating the procedures in places like Singapore and South Korea where growth rate of coronavirus is slower as shown in Johns Hopkins Data and a silver lining might emerge. Additionally, India going forward will have certain favourable factors including low oil prices and abundant global liquidity and can regain its bright spot positioning amidst a slow growing world economy. There is also a talk of various multinational companies diversifying their supply lines and India could be one of the beneficiaries.

It’s hard to make rational financial decisions when there’s so much uncertainty. Therefore, it is important to adhere to your goal based asset allocation which is in your control and you don’t have to deal with uncertainty or forecast anything. It’s always difficult to predict the lowest point and even if you succeed in getting out, then getting in will be difficult. Also famous adapted quote of Warren Buffet of not selling when there is fear in the market is very apt.

Important thing will be to run your existing liquid part of your portfolio as much as possible. If for whatever reason, more liquidity is required, then selling a small part of equity holding though unfavourable can be considered. To preserve value, it could be accompanied by purchase of an index call call option.

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