Market Recovery & COVID19

With the many ideas floating around on guessing the future of the equity markets, here are my thoughts. The conclusions are based on a combination of Technical Analysis and understanding of the impact of COVID19 on the global and Indian economy.

COVID19 and the Market Indexes

For most of my clients and my own profile, equity investment has taken a bit hit. Even the regular SIP based investments have taken a bit hit. COVID has brought down the market by about 35%, and in many stocks pulling down the value by more than 50%. Everyone’s portfolios looks red; some look purple! This is a ‘black swan’ event – an event that is very rare, and when occurs causes severe negative impact.

The world has already seen a couple of such events in the past – the 9/11, SARs oubreak, the H1N1 breakout, the collapse of the banks in 2008. All these were also reasons for the recession to trigger or aggravate the economic depression. Example – the world was already in a recession mode post the dot-com burst and then 9/11 happened. This deepened the recession and the uncertainty was very high. Hence, the event of COVID19 and the economic slowdown of the 2019-20 is not something new. We have seen it in the past – only with the different causes; the effect remains the same – recession.

What is different?

Before we jump into the past and predict the future, we need to be aware of something – While in 2000, 2009 the recession was global in nature and hence impacted India, some sectors such as Indian agriculture, domestic consumption were not impacted. The sectors such as IT and call-centers, and financial institutions that depended on Western economy faced the brunt of the last two recessions.

This is the first time in Independent India that a major economic shock has struck. Labourers – those engaged in construction and agriculture – have fled, or trapped without wages. Industries have shutdown, causing ancillary units to be closed. Many Central and State employees have decided to take a pay cut – this is unprecedented. Indian economy is facing it’s first real recession – and all industries are impact – everything is impacted – including the hospitals as many have shut down regular operations.

A look the the Index

Let’s quickly look at the Index – the Nifty to check how the fall has been. The fall has been very steep

Nifty Weekly Charts

A look at the Nifty charts (image snipped from Zerodha). shows that the market fell down for almost 6 weeks before managing to move up last week. Remember that in a bear market or a recession, sharp upmoves are expected. Last week’s upmove was based on hope that COVID19 has not been that severe in India, and that it would be over soon.

A look at the daily charts indicate something really strange –

Usually, when a black swan event happens, esp of the nature like COVID19, the market prices don’t move up beyond 20 EMA before some time. But in this case, markets have sharply recovered – despite the fact that American employment is at the highest ever, Indian Industries have shutdown for weeks, Europe is the most severely impacted continent in the world.

In the market, there appears to be ‘false optimism’, for the lack of a better word. Everyone refers to the previous recession charts and makes a case for recovery, and puts in the money before others do.

What should an investor do?

  • The world has certainly not ended – yes it is true that the world has not ended – however, it will take time to recover – a 6 to 12 months of recovery. SIPs that have been planned by a SEBI RIA taking into consideration all other factors should continue. The ones who did the “I think I have Rs 10,000 to invest” are the ones who may be a bit more troubled.
  • Do not put more money in the market unless you know what you are doing – Do not blindly put your extra cash in stocks that have fallen down 90%. 90% of the time such stocks do not go back to the previous highs. Your SIPs should be designed in such as way to grab the best of such downtrends.
  • If not done before – during the lockdown period, plan for your insurance, and also try to think about emergency funds. Black swan events are the ones that turn the course of history – just like 9/11 changed the way airlines operate, and also increased global conflicts ; COVID19 will certainly have its impact – what they will be is for world leaders to decide and disagree on.

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