Inoculation, Election & Finance

Sanjiv Mehta  |  2020-05-11

Many celebrities like to write about what they have been reading or listening to. One recent example is Barack Obama recommending a song Cold/Mess by Prateek Kuhad. It helped Kuhad a great deal especially in India, his followers multiplying manifold.

One author, who had written a book on cricket wanted to try the same strategy and once he was convinced that Trump does read, went about finding what he was reading currently. His improbable and wild hope that Trump might be reading a cricket book arose from the fact that Trump had addressed the best and biggest rally of his life in the world’s largest cricket stadium in Ahmedabad.  Results astounded him, during the previous week Trump had not only read fully three books, but also rather complex books on the esoteric subject of immunology.

In March 1991, days after the ground war in Kuwait, 90% of polled Americans approved of President Bush’s job performance. Bill Clinton had a very difficult election ahead of him. He was in a huddle with his advisors, strategising how to unseat the incumbent president. His close aide James Carville came up with a winning line “It’s the economy, stupid”. 2020 is the election year and now Trump was in a huddle with his advisors and took the credit for the line “It’s the vaccine, stupid”. His poll researchers have found that 64% of inoculated people are likely to vote for the incumbent irrespective of their party affiliation.

On a more serious note, Trump is totally focussed on a research effort dubbed Operation Warp Speed, which is a collaborative effort of pharmaceutical companies, government agencies and the military. Additionally, major European countries, Canada, Japan and Saudi Arabia have pledged more than $8 billion to initiate a global cooperation of vaccine research.

Vaccine development is proceeding at a good pace so far.  Human trials on the vaccine have already started in 3 countries including USA, China & UK – fastest ever for vaccine development to reach human trial stage in such a short time. In UK, University of Oxford began human trials on April 23. 510 healthy volunteers between 18 and 55 have been given the experimental jab.  Scientists working on the vaccine have said they could know within six weeks, that is by mid June whether it will work. If it works, doses might be available to ring fence the infection first and then gradually to reach a good percentage of the population.

However, expectations have to be tempered. No vaccine has ever been made on the kinds of schedules being targeted, counted in months rather than years. Scientists familiar with the process warn it isn’t certain that one can be developed at all, let alone by the end of the year.  Sir Patrick Vallance, chief scientific adviser, UK government said “All new vaccines that come into development are long shots. Only some end up successful. Corona virus will be no different and presents new challenges.” Additionally to get to the very large scale there is a huge technical and time consuming effort. Health experts also feel that that the virus could hit in multiple waves, which has led to fears that some vaccines might not work on mutated strains. Therefore the risk of disappointment is high.

The whole vaccine saga above is closely linked and interwoven with impact on the financial markets. One prominent economist said that this is a biological problem and only a biological solution can ease the economic woes .Therefore given the fluctuating graph of vaccine, the financial markets will keep on oscillating between hope and despair.

Consequently, our finances and portfolios have to be managed keeping the market volatility and uncertainty in mind. Risk and opportunity coexist and it is very difficult to just bail out and realize losses on an existing equity portfolio especially if one feels that a vaccine is just round the corner. On the other hand, if development becomes long drawn out, a second wave of selling cannot be ruled out.

At the same time, it is very difficult to construct a pandemic proof portfolio especially because in a major crisis, correlation between most of the asset classes increases. However, a few steps could make it better though a cautious approach will always be required.  One main exhortation which I emphasize in every article is to maintain adequate liquidity for 12 months. This should be in high quality liquid or overnight schemes or deposits in a good bank. Credit risk schemes should be avoided.

Equity portfolio composition could be strengthened. Health care stocks including pharmaceuticals, diagnostics, medical insurance and hospitals have done well and are expected to be relatively more resilient in a down turn. Similarly technology stocks have performed nicely and one very interesting stock which has moved up significantly is Reliance. By forging collaboration with Facebook, it is moving towards higher valuation of technology stocks. Two very highly regarded strategic investors in technology, Silver Lake and Vista have subsequently invested in Jio platform. General Atlantic and Saudi sovereign wealth fund are also seriously considering buying a stake. Long term presence in this stock directly or through good mutual fund schemes will make the portfolio stronger. Consumer staples, specialty and agro chemicals are other categories which might provide stability.  Financial stocks which were attractive prior to the crisis are likely to be affected most by the downturn, therefore their percentage should be less and restricted to high quality industry leaders only.

One hedging strategy will be to have 5-10% in gold expressed through gold saving funds. It is effective since it is a flight to safety asset class and inversely correlated with equities. In March 2020 when equities were falling sharply, gold went up. Additionally, buying a put option on a stock more vulnerable to selling amidst a downturn could be a good insurance for the portfolio. For example, stocks of midsized banks have done well during the recent rally and are more prone to a correction. The premium cost can be made lower by selling a call on a stock which might be an integral part of the portfolio but where the upside is perceived to be limited.

Hoping for a favourable vaccine and therapeutic breakthrough soon – observations on Trump’s reading habits and voting patterns of inoculated people were just light hearted comments.