Just like the disease itself, the second and third order effects on businesses and investments will keep coming up for a long time even after recovery
10-Aug-2020 •Dhirendra Kumar
A few days back I read an article that someone had posted on Twitter that talked about a bridge in Central America on a river called Choluteca. It's a famous bridge but you need to look at a photograph to see why it's famous and why I'm talking about it in a column on personal finance. So take a break from reading this page and search for 'bridge on river Choluteca'.
You'll immediately see the connection. There's a fine, well-built bridge except that the river does not flow under it, but to one side. It's funny when you see it, and surely the photos are used for many memes on social media, but it must be tragically unfunny for those who depended on the bridge. Apparently, when the bridge was built, it was in the correct place, obviously. However, as soon as the bridge was finished a massive hurricane came and caused terrible flooding. It completely destroyed the approach roads, and forced the river to a new channel which was not under the bridge. The bridge now spanned dry land.
This was two decades ago and the bridge was rebuilt soon after that, but those photos of a bridge from nowhere to nowhere show a powerful symbol of how circumstances can make even the best made plans utterly useless. For years, decades actually, personal financial planning has been based on the fact in broad strokes, that the future will run along a certain path.
Moreover, investing in equity and debt is based on the central idea of diversification. What is diversification at its heart? I mean what is the idea it is based upon? That everything will not go to the dogs at once. All sectors, all industries, all countries will not have a bad time simultaneously. If you spread your money around, then something or the other will be fine, as per the theory of diversification. But now, the idea of diversification is looking like the old bridge on Choluteca. Of course, I'm not saying that abandon diversification; it's still the only way to invest sensibly, but when push came to shove, it helped far less than it would have under normal circumstances. Those who were not diversified at all and are caught in the wrong sort of investments are going to get it even worse.
Don't come back and tell me that no, the markets are fine. That's an illusion. As corporate results are coming in, one can see companies whose sales have halved or more. For some, sales have basically disappeared. For example, four months ago I used to think that INOX was a good stock to invest in. During the first quarter, sales were down from Rs 371 crore to Rs 24 lakh.
Even companies that should in theory have been relatively immune are seeing sales cut to half. Hawkins, the pressure cooker company, is one recent example that comes to mind. Why is that? Well, because INOX employees are not going to buy a new pressure cooker even if their old one is broken. They'll just get it repaired. And because INOX employees won't buy new pressure cookers, Hawkins employees will not watch too many movies even when cinemas reopen. Or even if they do, they will avoid the overpriced popcorn from which INOX makes its profit.
So you see, the second and third order effects of Covid-19, some of them circular, are yet to come out. Much of it is unanticipated and will not be foreseen till it starts happening. Much like Covid itself, what side effects occur even after recovery are yet unknown. It's a long journey, and for the most part, it hasn't even begun.