Half Yearly Review 2020 – Investing in Post-Covid

The year 2020 began well for most of us until Covid-19 came as a rude shock and shook the foundations of our life.  Covid-19 is now declared as a global pandemic and we, as a society, have very little experience in handling such a health situation.  As we write this, the world grapples with Covid-19 trying to find a cure/vaccine to this existential crisis.

Though the life looks challenging, the world has seen many great challenges like this before and our human intelligence and resilience have helped to overcome the same.

The Indian equity and debt markets have had a roller-coaster ride in 2020 so far.

We went all the way to 42,000 on the Sensex and nose-dived to 26,000 on Covid-19 fears.  A good 38% fall in a matter of 6 weeks.  Then we pulled back to around 35,000 levels on the Sensex.

As investors, all of us would like to ‘predict’ how the market is going to move immediately. The below tweet from one of the greatest modern day investment thinkers, Morgan Housel, highlights the fact that it is incredibly difficult to make short term market predictions in the stock markets.

“You did not see the 35% decline. Or the subsequent 40% rally. But thank you for sharing your insight about where we’re going next.” -Morgan Housel on Twitter, June 2020

As we complete the half year mark in 2020, we will take a closer look at the key financial market developments in 2020 and analyze the impact on our investments.

Key Developments in 2020

In the half year gone by, we have seen

• Central Banks stepping in big time to ease the situation – Across the world, the Central banks have used their monetary power to alleviate the sufferings of this Covid-19 financial impact. Huge stimulus measures have been announced by the Federal Reserve of USA, ECB and BoJ. Our own RBI has been more than pro-active with their measures to bring calmness and stability to the financial system
• Roller-coaster ride in equity market & volatility – The volatility in the equity markets rose to an all-time high in March accompanied by an almost 40% fall. The VIX index which measures volatility moved up 8 times from 11 in Jan to 84 by March. Currently the VIX index is around 30
• Steep fall in deposit rates – The interest rates are in a downward spiral thanks to RBI aggressively cutting rates to support the flagging economy. The Repo rates were cut by 140 bps over the last 6 months resulting in sub-4 post tax yields on the popular fixed deposits.  We also saw deep cuts in the administered interest rates on Senior Citizen Savings Schemes
• Credit markets reacting wildly – Thanks to Yes Bank failing to raise money to improve their capital structure, the pressure got build up on the credit markets with people moving away from lower rated corporate bonds. Finally, RBI stepped in and through a consortium of PSU and Private banks pumped in capital to restructure Yes bank and to avoid the financial system crisis
• Franklin Templeton shutting 6 credit funds – The Yes Bank issue had an impact on the overall credit markets and had a very notable casualty in the form of Franklin Templeton closing down 6 of their credit funds due to liquidity concerns. As we write, more than 25,000 crores have been locked up in these 6 funds
• Gold gaining strength as a store of value – With the rise in uncertainty globally, the clamour for gold has picked up! Gold ETFs and gold bonds have seen fresh investments across the world
• Drop in Household and Discretionary Expenditure – With lockdown in place for more than 3 months, the value of card transactions fell from 1.5 lakh crores in Jan to 50,000 crores in April 20. Some of the spends will come back while some may never reach the pre-covid levels like travel and entertainment in the near future.
• Increased lay-offs, job losses and salary cuts – We have seen many companies across industries announcing lay-offs and job cuts resulting in thousands of job losses in India and across the world. In many industries salary cuts in the range of  30% to 40% has been implemented
• Heightened awareness about life and health insurance – Individual spending on life and health insurance has gone up 25% year on year. Interest and enquiries on long term life and health insurance are hitting the roof according to the google trends analytics

In this challenging situation, it is expected that the companies with solid business model, better balance sheet and top quality management will be able to not only survive the crisis but also garner market share to emerge stronger.

What are we required to do? 

Every crisis provides an opportunity.  This is the time to action the following:

• Revisit the asset allocation plan – Asset allocation will always continue to be the foundation of all financial plans. Every asset class has its risk (liquidity, returns, safety etc.). It is vital not to concentrate all our assets in one class but to build a diversified asset portfolio with sufficient liquidity buffer.
• Revisit your savings targets – This crisis offers a golden opportunity to revisit your expenses and identify the “necessary living expenditure” as compared to the “life as usual” expenditure. This will provide an opportunity to optimize your savings rate. With reducing longevity of corporate careers, maximizing savings is the most vital one
• Build Emergency corpus and insurance – During this time, we have worked with several families to revisit their risk management goals. We need to build an emergency corpus (as a multiple of monthly expenses) which is in line with your age, goals and job security. Continuing and topping up medical and life insurances over the years is a basic need.
• De-leverage personal balance sheet – It is important to critically evaluate the loans taken and see if there are ways to close them. Remaining light on the debt side gives peace of mind.
• Embrace volatility – Start accepting and embracing volatility in your portfolio. Volatility is going to stay for some time.  Avoiding an asset class just for volatility, will make it difficult to achieve goals

It is important to be resilient and just stick to your financial plan. Premature withdrawals and jumping from one asset class to the other will never build long term wealth.

None of these points are new for the regular blog readers. We have been insisting on these fundamentals over the years. Many of these measures will come handy during tough times.

The current tough scenario will not last forever.  We sign off with the hope of having a better second half