The shock that coronavirus seems to have wrought on the world markets is unparalleled in recent history. The fact that it has gone on to effect mobility and social interaction has only amplified the sense of panic which is abundantly reflected in financial markets. As we grapple with index drops of 20%+, the 10 year treasury yield of 0.75% and stomach churning volatility some things are highly probable and some remain unknown.
In these times, its important to take a step back. What is highly probable is for a globally coordinated policy response to try to curtail the dramatic effect of the demand shock on the global economy. India’s central bank should and will take appropriate policy measures in line with this. Though this will not affect the spread of the contagion, it will try to address the negative effects on the economy.
What is uncertain is how and when this is likely to be contained. The US looks like the next place where a spike is to be anticipated and this does not augur well for sentiment in financial markets. What is also uncertain is if indeed there might be a 2nd wave of the outbreak in some places as the extreme public health measures are pulled back (notably in China).
Amidst all the panic, we don’t know what the future holds for the market or the world in the very near term – HOWEVER, we do think that, as of what we know today, it is unlikely to change the way we live or change the way businesses are operated or valued in the long term. Therefore even as India goes through this period with the overhang of a very weak economy, we are convinced that there are high quality businesses out there for whom competition has reduced over the last few years and will further reduce, whose market shares have increased and they will continue to gain as there is shift to quality, whose distribution networks have become stronger and for whom tax rates have become significantly lower.
While markets may well go down further, investing when terrified is one of the hardest things to do. It is through this terror that one must think rationally and look to buy great businesses which are unleveraged, which are stellar capital allocators with the highest governance standards and which will not just survive but come out stronger over the next 5 to 10 years and thus potentially provide outsized returns to the intrepid investor.
Excerpts from the article by Siddharth Mehta have been covered here :-
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