Investing in COVID times

It has been nothing short of a tumultuous 9 months with the Virus, the lockdowns, the March global selloff and the equally spectacular recovery from the lows of 7500 on the Nifty to 13000. To a large extent, the recent rise in equity markets has been propped up by a massive fiscal stimulus from Global Central Banks, particularly in the US where the CARES act injected 10% of GDP in the economy.

We had advised our investors in early January (well before COVID) to defuse portfolio risks. Some investors have shown more resolve than others and those who have deeper pockets ready to deploy continue to invest via SIPS. While you may wonder whether markets currently reflect real-economy impacts, be assured that it is never to late to defuse risk or rejig your portfolio.

So whats next with news of vaccines coming in 2021?
The good news is vaccines insure us against indefinite “lockdown/reopening” cycles. As long term investors we could choose to look through this phase as a mere bad dream. This is what equity markets are largely doing. Governments too have learned from their mistakes about reopening too fast, since pressure on healthcare capacity is high.

As always your level of optimism as an investor at this juncture is dependent on your investment time horizon. We now know for certain that we are not sentenced to and endless repetition of lockdown/reopening cycles. Uncertainty on the roll-out of the vaccine is high but, “herd immunity” is being touted as the other vaccine and could allowa restoration of mormalcy. However, we need to brace ourselves for challenging months ahead and for a relapse in India’s GDP which at negative 7.5% is well underway.

Coming up with various “ recovery scenarios” for talking bulls has now become a cottage industry. We now know that that “V-shape” recovery did not materialise. We never believed in it in the first place even in the absence of the “second wave”. Our view always was that there would be no spectacular rebound upon reopening, lagging demand would slow GDP growth. Do note that even in China, which so far has avoided a “second wave”, private consumption is still “below trend”.

In ouropinion ,calibrating the speed of the recovery in the second half of the next year is difficult. In a “rosy” scenario, households would quickly catch-up on spending and the bulk of the savings overhang accumulated in 2020 would find its way back to consumption. In a similar fashion, firms would immediately step up their investment effort.

We prefer to be more circumspect.

The true state of the Global economy is much worse than what the usual indicators would suggest and there is no escaping a backlash when the printers are wound down. Businesses will have to factor in steep elevation in corporate debt as well as uncertainty around the likely strength of demand.We also need to be realistic about world demand and fiscal policy .While we don’t doubt fiscal policy will remain accommodative , especially in the US and Europe , there is a wide margin of uncertainty on the quantum of such actions. In the US, if the Democrats win the two remaining Senatorial races on 5 January 2021, their fiscal stimulus program of 10% of GDP will be in play. If they don’t, they will have to find a compromise with the Republicans who currently hold to their $500bn red line (2.5% of GDP).

$500bn is not small change,but it may not be enough.

It would be prudent for investors to consider the idea that returns are going to be challenged in the months and quarters ahead and there might even be a period of negative returns if markets self-regulate and selloff. There’s already enough drama in commentaries about the stock market bubbles and comparisons to 2000/2007 without us adding to it.
However, some questions keep coming to mind when we think about the outlook for fixed income investors who have borne the brunt of low yields, even negative in some cases.According to Bloomberg, the global market value of bonds that have negative yields is $16.7Trillion. US 10 year bond yields barely return 1% p.a. and the entire European bond basket yield has a negative yield to maturity.Remember barely a few years ago Italy . Greece Spain were unable to meet even their interest obligations and had to be bailed out. Today ,thosebonds are an accepted“asset class” with a guaranteed negative return.

It’s quite mad really.

Calling the low in yields is a dangerous game. A lot has been done to support bond markets this year and that will continue as Central banks keeps the taps open and that will continue to be the strong hand in the market . Not just Central banks but also institutional investors, insurance portfolios or pension schemes. However, with prices set at the margin ,should markets or the Fed take the view that we do not need or cannot justify lower yields, negative price momentum could take hold quickly and without warning. The view from the big Wall street analysts is that trade-sensitive economies( who reportedly have the virus situation under control ) like China ,Korea, Taiwan, Thailand and Singapore will see a faster recovery than the inward-looking economies India, Indonesia and the Philippines that are still plagued by COVID.

In short policy directions will diverge by countries pursuing different recovery paths. More rate cuts – between 25 to75 basis points are expected in India where growth headwinds warrant further easing. Even the RBIs latest policy says it will remain accommodative to counter any economic shocks .

As for have of those of us who are still waiting for Templeton to pay back, consider that a lesson well learnt. If marquee names can’t make it work, it’s unlikely the small boys will i.e the higher the yirld, the higher the risk. Same holds true for Gold/ Silver/ Real estate which may have outperformed in 2020, yet on a 10 year horizon, its barely returned a yield.

So as I asked before, we do we go next as portfolio investors? We are still looking for new safe havens- GOI’s Gold bond offering could be one , even though returns are low . Bank FD’s are still the best hiding spot. New banks like IDFC First Bank and RBL do offer 7% p.a.on Savings accounts with 0.5% additional for Senior Citizens. The risk there is how much exposure can one take here, as also with the better corporate names like L&T finance, Bajaj and Mahindras.

What we do know if where we would NOT invest. The new NFO’s with fancy themes – Green / Special Situations/ ESG/ Burger IPOs will be common this year. It is not a coincidence that amongst the list of worst performers are the PSU’s and REITS with high levels of debt.

It is worth remembering that a company whose share price has declined 80% needs to increase five times just to get back to where it started. We do not believe we need to take that risk with your money. That’s an arduous journey and one that we want to avoid as far as possible with our investors’ money.

We can only hope that as prudent investors you will not chase Atmanirbharstories.
But history teaches us that unfortunately greed often trumps sensibility.
Stay safe, invest safer

About the Author

Rajiv Goel – CEO Bombay Capital Services, bum in 1968, in Mumbai, in a family of traditional textile traders studied in a local Convent school named “Campion” and completed his Commerce graduation from H R College Initially, first 5 — 6 years he was a pad of the family business following which he started taking interest in the stock markets which were still in a nascent stage in India.

Even before he completed his graduation, he started his own Sub-Oolong business in the Bombay  Stock Exchange using his street smart knowledge acquired through venous sources He learnt the ground rules of the business in the era of Harshad Mehta and Ketan Parekh.

In 1995, he established  a proprietary  company called “Bombay Capital Services “, a financial advisory firm which advises dents on the fundamentals of small savings. These include sublets like PPF, Gold, Equity, Mutual Funds and similar asset Classes.

Based at New Marine Lines, the company has a ten minute proximity  from the Churchgate and V.T stations making it convenient for the client to access. Over the past 20 years, the company caters to more than 1000 dents including HNI’s, Corporates/ Bank, Retail Investors. The company has a dedicated team and research desk which advises clients on Equities Commodities, Forex, Mutual Funds and Insurance. Presently, it has an office in Mumbai and Delhi and plan to open up branches shortly in Kolkatta and Chennai.