The days passing now are unprecedented, NIFTY50 has dropped from a high of 12413 to a low of 7537 i.e. a significant drop of approx. 39.28% and SENSEX which was at 41700 levels in mid-February came down to 25638, both indices as on 24th March 2020, though they corrected a bit in later two-three trading days. If Nifty has dropped this much, it’s no question that many portfolios have dropped more than that. All attributed to the global economy reaction to the major crisis brought by COVID-19 (coronavirus) in addition to other pre-pandemic factors.
Global Markets trading in red and the NIFTY50 chart below are self-evident of the situation.
First of all, this is not a 2008 sub-prime mortgage crisis, it’s a pandemic crisis and V shape recovery in the market is possible when things started to recover as the market is based on future expectations. Let’s first see the fiscal and monetary stimulus by RBI and Govt. to revive the economy as the Financial market is the gauge of the economy then we will dive into the equity market.
On the fiscal side, our finance minister has announced an economic package of 1.7 lakh crore. A host of steps under “PM GARIB KALYAN YOJNA” which include Rs 50 lakh medical insurance for doctors, paramedic & other medical staff. Additional benefits like 5 kg wheat or rice per person for 3 months, 1 Kg free dal per household for 3 months, free LPG for Ujjwala beneficiaries for 3 months, Rs 2000 to 87 million farmers under PM Kisan in 10 days. Rs 500 per month to 200 million women Jan Dhan account holders through DBT.
On the monetary side, RBI cut the repo rate from 5.15 to 4.40 which is 75 basis point cut, Reverse repo rate was cut by 90 basis point to 4% this has been done to make unattractive for banks to park money to RBI and lend more. CRR is cut by 100 basis point to 3% unlocking Rs 1.37 lakh crore primary liquidity in the banking system. RBI has also allowed banks and other lenders (NBFC’s) to extend loan repayment schedules and moratorium by 3 months.
So, as we can see there has been a lot of things done by both govt and RBI to revive the economy and sentiments for the investors. Now we will see what should be done and which stocks to buy in the market crash.
Firstly, as a retail investor, we should not panic! Though it sounds easy but difficult to practice as Warren Buffet says “Be fearful when others are greedy and be greedy when others are fearful”. It’s the time when others are fearful and selling stock which gives a good opportunity for an avid investor. If one has already invested then it’s the time to sell fundamentally weak stocks and invest in quality companies.
By quality companies, I mean to say whose return on capital is much more than its cost of capital and have a strong balance sheet. Due to this lockdown, many companies with weak balance sheet would suffer huge loses which would result in more decline in their share prices as well as their market share, if you as an investor has these type of companies then one should look to square off their position and use the cash to invest in quality companies.
Some of the practical tips that an investor looks for before buying can be:
- Market leaders that have strong fundamentals have fallen significantly because of this COVID-19 Ex. Maruti in automobile, Bajaj Finserv in NBFC, HDFC in banks.
- One should look for the financial sector in their portfolio as they are underpenetrated and have huge potential (Credit to GDP is low, Equity investment to GDP, etc).
- Crude oil prices have fallen significantly because of a price war between Russia and Saudi Arabia (OPEC) so companies that have crude oil as their raw material can reduce its COGS thereby increase in PAT which can translate to higher EPS examples paint industry.
- Virtually debt-free company has an advantage as a lot of FII and FPI’s inflow will come into these companies when the economy revives.
In situations like this market leaders have an advantage as they have economies of scale and the smaller players with weak demand and stretched balance sheets give their market share to these leaders. A similar situation is seen during automobile slowdown. Chevrolet left their Indian business, Ford has made a Joint venture with Mahindra and Mahindra, Maruti can have an advantage in near future because of this.
At last, I would suggest that stick to quality companies that are making essential small ticket size products don’t try to invest at nearly bottom, start investing small and increase your size when the market picks the up-trending momentum.
I hope this was an insightful post for you to read. Read some other posts related to business models titled “Business Model of Swiggy and Zomato: ‘Data’ the dark horse” and “Amazon Business Model”