Investing amidst uncertainty

Sanjiv Mehta  |  2020-04-05

A. Uncertainty
There is uncertainty about the impact of this crisis. Future trajectory hinges on something that is beyond the professional competence of most economists to forecast- medical instead of financial issues will determine duration and severity of this economic sudden stop.

Let’s see what various experts are saying; and one sees wide divergence. For example, Nobel Laureate Joseph Stigliz is of the opinion that we have no certainty of the virus going by the end of the second quarter. If it lasts through the summer, deleterious effects on economy will be amplified.

A more optimistic voice is that of Jeremy Siegel, one of my favourite finance professors at the Wharton School and author of a very useful book ‘Stocks for the long run’. He is happy about the magnitude of fiscal and monetary stimulus. He feels strongly that the government should have an objective which is quite achievable in his opinion – and that is to enable millions of people to go to work in a safe manner in two months by practising effective containment and social distancing, working on therapeutics and vaccines and widely available testing to find out who has antibodies.

B. Shape of Economic Recovery
This will be dependent on duration of the crisis. Mohamed El- Erian, chief economic advisor at Allianz and an astute portfolio manager says that restarting the economy will be lot more than just flicking on a switch. It will only be a gradual return to normal working life as social distancing might linger for some time. Travel and restaurants will not return to normal in a hurry. It will take more time to get back to play than to get back to work. Consumer caution is already evident in China.

Therefore, nobody is talking about a V shaped recovery. Greg Valliere, a Washington based policy expert is encouraged by a slight decline in Italian fresh cases, calling it a turning point in corona virus crisis and is expecting a U shaped recovery because of pent-up demand for spending. More plausible is a Nike Swoosh recovery, the term coined by Mark Zandi, signifying a big plunge, followed by a bounce and then limping along- Nike as a sports shoe manufacturer can possibly sue him for linking their much respected logo to limping. Overall, it will take time to reach pre crisis levels of output.

C. Indian Economy
Indian economy, which was already in slowdown phase for last six quarters, could register the lowest growth in the post-reform period, in 2020-21 despite strong monetary and fiscal stimulus measures. ADB has predicted that Indian economy will grow at only 4% in FY 2020-21 while Moody’s investor service is forecasting even a lower growth rate of 2.5% because of severe shock to the global economy and inter connectedness of various economies.

Nobel laureates Abhijit Banerjee and Esther Duflo displaying social proximity in a joint conference highlighted Covid 19 challenges confronting India in particular. They talked about the conflict between life and livelihood- what we are doing now to save lives must not snowball into such a big economic crisis that we lose livelihoods. They are advising a short lockdown followed by a strategy targeted at hotspots.

They talked about positive factors in India- hopefully, if there are lots of asymptomatic infected people, we are closer to herd immunity. BCG vaccination, though undocumented is being talked about as providing immunity against corona virus. Hot and humid weather might play a role too. Additionally, India is an extremely young country with average age of 28 years.

They are advocating a big fiscal stimulus and utilizing it for getting cash and food to poor people and migrant labourers. They are also worried about other segments losing so much income and so much wealth that they will sit on what they have and will not spend. They are advising to follow Keynesian policies and not to think of inflation since oil prices are low. RBI has already made several significant moves, cutting the interest rates and bolstering several liquidity measures.

Once the crisis is resolved, Indian economy has the potential to be a bright spot again – reasons are domestic consumption being 2/3rd of total economy, favourable oil prices, abundant global liquidity, and opportunity to give a big fiscal stimulus, favourable demographics and benefit from possible diversification of global supply chains .

D. Post corona world
Will the world be a different place?- Thomas Friedman has already coined the terms BC & AC.

Digital push which was already happening gets reinforced; Zoom has already zoomed past Uber in market capitalization. In India, BPO industry is very big and I just heard CISCO president recounting how they facilitated various BPO companies to enable their workers to work from home on a massive scale. Even kindergarten schools are running classes online. Online conferencing and even house parties are being conducted. Mr. Modi has conducted many virtual group meetings with other heads of state. Online gaming also seems to have a good future.

Health care will undergo a change- Bill Gates has been advocating for a long time that health care forces need to be organized in an army like manner where there are regular drills and they are prepared to act when faced with a pandemic like the current one. There will be lots more emphasis especially for India to improve physical infrastructure, number of health care workers, various kinds of equipment, health insurance, home tests, diagnostic capability and telemedicine.

For corporates, there will be greater emphasis on resilience even if some efficiency is lost. Global chains might be more price effective, but there will be a move towards home production. There might be greater regulation of private-sector activity by governments.

At national level, social policies might change. There will be an effort to help workers in the informal sector. There will be an effort to keep proper records of migrant labour and provide them with social protection.

Some percentage of positive cases was attributed to religious gatherings. Such congregations might be conducted in the future with greater prudence, with restrictions on number of participants and new rules on sanitation.

E. Investing amidst uncertainty
My portfolio strategy taking into account diverse views and amidst uncertainty is not to try to predict the market bottom or the timing of it, since that is a futile exercise. Instead, I will keep on emphasizing the basic principles which I have stated repeatedly in the previous articles. That is to maintain liquidity and therefore resilience for at least 6 months and at the same time not to disturb as much as possible the core equity portfolio.

Market is still in a negative trend and considering the prevalent ambiguity, buying at these levels is generally not advisable. However, people with more than adequate liquidity and who really want to buy so as not to lose the opportunity of a spike because of a medical breakthrough or evidence of good containment, may invest using rupee cost averaging in 4 tranches. Important factor will be to constantly follow numbers of new cases, progress in testing and therapeutic research results

This is also a good opportunity to upgrade the quality of the portfolios and to sell the bonds or stocks of any company that has no or low cash reverses , negative cash flow or high indebtedness. Quality of fund schemes and stocks becomes even more important as there will be a larger differentiation between winners and losers.