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Viral investing

How to use the pandemic to set your investments up for future gains

Viral investing

What'll the world be like one year from now? Don't bet on worst-case scenarios to come true, either in your personal lives or your savings and investments. Of course, things will get worse before they stabilise and then get better. However, the basics of the world will not change.

Look at similar events in the past. During 1918-19, a great influenza epidemic swept the world. About 5 crore people died worldwide. India was the worst hit, with about 1.8 crore dead. That was about 5 per cent of the population at the time. That disease was far worse than COVID-19 is, and medical science was primitive compared to today. On top of that, the First World War (1914-18) had just ended. And yet despite all that, the years after that were a great expansion of economic activity and prosperity. So much so that the exuberance got overdone and resulted in the crash of 1929 and the ensuing depression. Some of us may have heard grandparents and great-grandparents talk about it.

However, the fact remains that the impact of the medical disaster, even such a severe one, was short-lived. Life goes on. Billions of people live their daily lives - they work; they eat; they buy things. Even at this stage, we would hazard a guess that life will change less than we think it will. Humanity and the world has seen worse and recovered pretty quickly.

Still, some things are up in the air. The last 20 years have been a great education for all of us who invest in stocks. Before that, there used to be crashes and slumps in the Indian stock markets but they were like storms in a teacup. Our markets were tiny compared to what they are now and they were practically unconnected to the rest of the world. We had our own little scams and slumps but they were isolated from the world. All this changed with the so-called dot-com crash of 2001, which was the first 'globally integrated' crash of the Indian markets. Year 2008- 09 was even more so.

What can we expect now? The obvious answer is that we do not know what to expect. At this stage, the biggest worry is that in India and elsewhere in the world, the disease spread is just beginning. What will happen is still a complete unknown. The impact could be deep but short, or it could be long and shallow, or anything in between. Some industries will have one kind of an impact, some another. For instance, one can hardly doubt that travel and passenger transport will be in bad shape. Some industries will have supply shocks, some demand shocks and some both. Some will recover quickly.

Inevitably, global companies that wish to diversify from an overdependence on Chinese supply chains may shift some business to India. Even so, at this stage, many investors are close to panic or have crossed the line. No one likes uncertainty, and this looks like a bad case indeed.

The thing to understand is that 30-40 per cent declines are not uncommon in the equity markets of the world and we do have a history of how markets fare after such shocks. One useful thing to do would be to look at past declines in stock markets and see what happened subsequently. Take a look at the table 'After the Sensex fell 20 per cent' that we have data-crunched to understand what happens after big drops in the equity markets

Viral investing

This analysis looks at eight periods when the Indian markets (as measured by the Sensex) declined 20 per cent or more and then examines what happened as time passed by. The three time periods we examined were 12 months, 24 months and 36 months. The question we asked was 'How long did the markets take to recover after a deep shock?'

The data answers this quite emphatically. We find that even at the shortest 12-month period, the BSE Sensex recovered well. In most of the cases, the gains from the bottom were large, with only the 2000 dotcom crash still strongly negative after one year. As you can see, the recovery after two years and three years is even stronger except for the odd case of 1995, when a second slump had started by the time the three-year period ended.

So are we saying that equities will recover one or two years from now? While we are not actually saying this, the chances of a bounce-back are strong. Of course, right now we are in the middle of the crisis and we don't know how far this is going. When one is in the middle of a crisis, then the situation looks very dark. Later, rational expectations and analyses enter the mind and things start looking different.

As in every crisis, managing one's psychology is important. Today, a lot of media and social media are busy painting doomsday pictures. Why are they doing this? Maybe because it's good business to get as many clicks and eyeballs. However, an excessive and continuous exposure of a large mass of people to this relentlessly negative coverage does cause excessively pessimistic reactions. And yet the fact is that China, South Korea, Japan and Singapore have demonstrated that the problem can be contained with a combination of approaches. Even Italy saw a slowdown of new cases eight to nine days after a complete lockdown commenced. Yes, there will be slowdowns and recessions, but a bounce-back is inevitable.

This brings us to the real question: what should you actually do? The answer is the same that it ever was: buy quality. In fact, this is the greatest time to buy quality stocks. There were so many that were great except for the price being too high. Now is the time when we can land them at a good value-oriented entry price.

This is not a new phenomenon. Here's a great example: back in 2008, HDFC Bank fell to half its value. If you had bought it before that crash, when it was at the peak of that time, your money today would have grown five times even after absorbing that huge loss. From the bottom, it's about 10 times.

There's no shortage of quality stocks that are going abegging right now at once-in-a-decade bargains. In fact, in our premium Value Research Stock Advisor service, we have taken the opportunity to launch a 'Best Buys Now' list that features 12 carefully selected stocks that fall into this category.

Now let's wash our hands and without touching our faces, start investing.