Keep calm and eat Chole Bhature!!

I was seeing an FB post from a friend, who had Chole Bhature at Sita Ram Diwan Chand recently. Given that it has one of the best Chole Bhature in India, it naturally did trigger the desire in me to go and have a Chole Bhature there!! The restaurant carries the slogan “Keep calm and eat Chole Bhature”

If you are wondering why we are talking about this in a market update, we feel that this has a message for us in our investing journey as well. In the midst of all the negative news and fears which surround us today, we should keep calm and continue to invest as per our long-term plans. (On a side note –Keep Calm and Carry On was a famous motivational poster which the British government made in 1939 in preparation for World War II. It urged the British people to stay calm in adversity.)

This article is a follow up of a note we posted last week on the Coronavirus. You can read here. While none of your long-term plans should change, we want to add our views about the latest developments (Yes Bank, Crude Oil plunge, the pace at which the coronavirus has spread etc.)

Developments in March 2020 till date

The fear and uncertainty has deepened significantly in the last fortnight with attitudes swinging from extreme complacency to extreme fear. In financial markets the Cboe Volatility Index (known as VIX), yesterday hit its highest intraday level since 2008. What has been stunning is that the VIX levels have moved up 280% this year (compared to 108% in 2008 itself!)

Let us look at the events in a bit more detail

• The coronavirus has spread across countries with Italy, Iran and South Korea being impacted adversely. While China seems to be trying to contain the spread, it has now spread to the US and other parts of Europe
• Rapid fall in oil prices– to add to the demand side fears, the OPEC and Russia were not able to reach an agreement on oil production cuts and both Russia and Saudi Arabia are planning to increase their oil production. While the impact of this merits a separate note, the Brent crude price has dropped drastically to a multi year low of 36 USD/barrel
• SBI equity stake in Yes bank – The problems being faced at Yes Bank due to management challenges and bad loans has been surfacing for the past few years. In March, finally RBI took over and appointed an interim administrator. SBI will be taking a 49% equity stake in the bank, and the administrator is working out a revival plan. From a market viewpoint, at least there is some relief that the problem is being contained at current levels.

 Long term Impact on the Indian Economy

As always financial markets react adversely to uncertainty in the short run. However, do remember that it is our behavior in these times, which decide our long-term returns. If we ignore short term returns for now, let us look at the long-term impact from an inflation viewpoint

• India will save 200,000+ crores per year from the Crude oil drop – The oil price drop is a huge benefit for oil importing countries like India (we save Rs 11,000 crores for every 1 dollar drop in Brent crude prices). Last year our average import cost was 65 USD/barrel. Assuming that oil stays below 50 USD/barrel this year we are looking at huge savings beyond Rs 200,000 crores. Of course, this will be offset by likely drop in remittances etc. But the potential benefits are huge
• Lowering interest rates – The coronavirus has resulted in a 50-bps rate cut by the Fed. Overall US yields have plunged. In India over the last four months, 10-year government bond yields have dropped from 6.8% in mid Dec to 6.15% today. That is a 65-bps drop, which reduces the cost of borrowing.
• There is an abundance of liquidity in the world financial system currently. Once the long-term confidence in emerging markets comes back, India will be a prime beneficiary on foreign fund flows

Cumulatively, India is a net beneficiary from the commodity price slowdown and the drop-in interest rates. This will give temporary breathing space on the fiscal side.

What should we do now?

As stated in the earlier note, we should stick to our long-term plans with asset allocation based on our goals. The other key question is how to manage the current liquidity. We would like to refer to a note from Howard Marks, the billionaire investor came out with a brilliant note earlier in March.

“I think it is ok to do some buying, because things are cheaper. But there is no logical argument to spend all your cash, given that we have no idea how negative future events will be”

Nobody knows the impact of the coronavirus and everyone is making a guess. Definitely the virus will have an impact on the global economy, and one will slowdown in spending and supply chain disruptions. As always, the market will react in a disproportionate manner.

The key question is – with the fall in prices, has value emerged for the long term?

Given the extent of the loss, this is probably a time to start deploying the spare cash we have for the long term. While we need not deploy all the money, gradual deployment in a phased manner will save us short term anxieties.

We will end with the famous quote of Sir John Templeton

“People are always asking me where the outlook is good, but that’s the wrong question… The right question is: Where is the outlook the most miserable? Invest at the point of maximum pessimism.”

In summary –   Stay calm, safe and healthy! This too will pass.