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Coronavirus: Impact and Rescue Plans for Investors.

Updated: Mar 21





You must be thinking “In 2020 If we are surrounded by some of the most advanced technologies then why aren’t we concentrating on Coronavirus Vaccine and come up with a solution as fast as possible?”

Well, before even thinking about this, you must be aware of the phases of the clinical process. (Source: Lupus Research)

Let me tell you, It takes at least another 12–18 months to find a suitable vaccine. Why?

For instance, once a drug company gets its hands on a potential vaccine it begins testing the drug in phases. First, we have the pre-clinical trials, where the vaccine is tested on animals or animal cells. If scientists can prove that the drug isn’t toxic, they can go ahead and begin testing it on humans.

When you get to human trials, you first begin with a small number of people and administer tiny doses to ensure it isn’t fatal. Once you are through with this bit, you can start testing the drug in higher doses (in later phases).

Slowly you ramp up the testing by including more patients and between the pre-clinical, phase 1, phase 2, and phase 3 trials (which usually involves thousands of participants), the drug company will have spent billions of dollars over many many months trying to muster enough evidence to prove that the drug is effective and does not induce rare long term side effects. So despite what anyone’s telling you, the vaccine isn’t coming any time soon.

Let’s talk about the virus, its impacts on markets and what lies ahead.

1. The Virus and its impact

As of 12 March, only 29% of the active cases were in China and the remaining 71% were in other parts of the world. Active cases mean the infected people who are still being treated and not yet recovered. While the situation is improving in China, Covid-19 is leading to lockdowns in countries like Italy, South Korea, and Iran. Due to spiraling numbers, the US and many countries in Europe are staring at a grim situation.

Till now, there is a total of 169,610 confirmed cases and 6,518 deaths have been reported.

India reported 110 confirmed cases and 2 deaths (Both were senior citizens and were suffering from other diseases as well)

Maharashtra is leading with the highest cases (33).

Overall, India is among one of the least affected countries in terms of deaths and infected people.

2. Impact on economy and markets:

Take Pneumonic Plague, SARS, Swine Flu, MERS, EBOBA, Zika. Charting world stocks with pandemic-type events overlaid as black dots on the graph. As you can see, none had any clear impact. In fact, only 2 of 14 are correlated with a sharp downturn, and stocks did really well after 9 of them! So, the exact market impact of a Pandemic can’t be measured.

Some Major global events:

1. As of Dec 2007, Sensex was trading at PE of 26.94 As of Nov 2008, Sensex is trading at PE of 11.88.

As on 30 April 2019, Sensex was trading at PE of 28.14 As on 13 March 2020, Sensex is trading at PE of 20.82 (Source: BSE)

A word is enough for the wise, there is still room for more downside.

Although PE doesn't talk about the debts but it is widely used to determine the valuations.

2. No Interest on loans in US (Fed cuts interest rate to zero)

The Federal Reserve lowered the target range for its federal funds rate by 100bps to 0–0.25% and launched a massive $700 billion quantitative easing program during an emergency move on March 15th to protect the US economy from the effects of the coronavirus.

3. Dow Jones performed historic best & worst in the same month & year.

4. Brent crude at $30.96 a barrel,

Why? A short story.

OPEC is a cartel that includes 14 nations, predominantly from the middle east whose sole responsibility is to control prices and moderate supply. They can do this because these countries control most of the global oil supply and Russia also happens to be the 3rd largest supplier of Oil in the world (12% of all oil produced). This means they too have considerable influence in controlling the global oil supply.

Now Back in 2017, OPEC and Russia started colluding informally to cut production and prop up prices. This came against the backdrop of oil having made some terrible lows. So two big parties coming to keep prices stable obviously helped. And after about two and a half years of prancing around doing the whole informal thing, they decided to get serious.

After Corona Virus came into the picture, Air travel has taken a beating. Industries are shutting down. All trading activities are on edge. And the global economic outlook has soured rather considerably. So OPEC has been insisting on deep production cuts to keep prices stable. Russia, however, has been tentative. And last few days back they decided to pull out of talks completely.

It doesn’t matter. Because the Saudis have taken their cue and they are acting now. OPEC is on the offensive and they’ve already started selling oil at deep discounts. They’ve also threatened to flood the markets with oil in the coming days.

Talks between OPEC and Russia had finally collapsed, possibly precipitating a price war that could push oil (Brent Crude) down to as much as $20 a barrel. Yes, you heard it right.

However, this might be a good news for India. India’s dependence on oil is well documented. We import 84% of all our crude oil. And if a fortuitous event were to push oil prices down, we’ll get it cheaper. This also gives us an opportunity to get our house in order. Perhaps we could use the savings to invest in avenues that could help us boost growth. Maybe the government will finally be convinced to pass on the benefits of low oil prices to customers like us.

5. Yes Bank Crisis

RBI & the government took the matter in their hands and RBI tells individuals can not withdraw more than Rs. 50,000 per month from their Bank account.

Investors who are rescuing the bank:

The board of ICICI Bank approved an investment of Rs 1,000 crore in Yes Bank.HDFC will also buy 100 crore equity shares of Yes Bank at a price of Rs 10 per share, investing Rs 1,000 crore in the private bank.Axis Bank, in its exchange notification, said that it will invest Rs 600 crore.Kotak Mahindra Bank will be investing Rs 500 crore.Bandhan Bank to invest Rs 300 crore.

Sensex fell by 2919.26 points (-8.18% ), the worst continuation of the week in history.

Indian Markets even hit the circuit and trading halted for 45 mins.

What Investors should do now?

a) Existing Investors:

It doesn’t matter whether you invested in equities via PMS, MF or directly with the help of SEBI Registered advisors, your portfolio must be bleeding.

The only suggestion would be waiting for the right time and then average your positions and don’t be fooled by short term rallies. Even if there is still room for more downside but once the market forms the bottom, there will be numerous opportunities to tap and you will have more options than your requirements.

b) New Investors:

Don’t try to jump into the market based on short term false rallies. Wait for the right time and concentrate only on blue-chips and stable companies as of now.

How would I know if the market forms the bottom?

Here are some of the signs:

1. The slowing pace of confirmed cases of Covid-19. 2. Releasing the lockdowns of countries. 3. Stable market for a week or two. (No circuits) 4. No more work from home.Schools, malls and theaters run as usual. 5. Intense inflows of FIIs/FPIs in equities.

There are three indicators that tell the state of the economy: Leading, Coincident and Lagging indicator. A leading indicator is an economic factor that changes before the rest of the economy begins to go in a particular direction like S&P, whereas a coincident indicator is a metric that shows the current state of economic activity within a particular area like IIP and a lagging indicator is a financial sign that becomes apparent only after a large shift has taken place like Inventory to sales ratio. Therefore, lagging indicators confirm long-term trends, but they do not predict them.

By less traveling, using masks and sanitizers If we could able to reduce the infections as much as possible, our healthcare system will be able to handle cases much better, driving the fatality rate down. And, if we spread this over time, we will reach a point where the rest of society can be vaccinated, eliminating the risk altogether. So our goal is not to eliminate coronavirus contagions. It’s to postpone them.

The more we postpone cases, the better the healthcare system can function, the lower the mortality rate, and the higher the share of the population that will be vaccinated before it gets infected.

Bottom line: Even one of the greatest investors/analysts/Marketgurus never expected that Sensex will fall from 41,945 to 31,412 less than 60 days. Never! But this is the fact we all have to digest. The best part is, Since the beginning of Indian Stock Markets, no evil power dared to stop it to reach to new highs. Never!

Have faith and before doing anything else, go wash your hands!

Akshay Seth Linkedin | Twitter | Quora akshay.equity@gmail.com

Sources:

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