The coronavirus scare hit the markets sharply last week. Panic selling saw Dow, S&P 500 and Nasdaq crash by 10, 11 and 12 percent respectively for the week ending 28th February. Nifty corrected sharply by 879 points for the week. The selloff was global.
Even though the coronavirus hit China last December, the markets viewed it as a China problem. Even when it spread to a few other countries, the markets remained complacent and discounted the containment of the virus. But with the virus spreading to the developed world and the WHO indicating the possibility of it becoming a global pandemic, the markets reacted swiftly and sharply.
The crucial questions are: Can the spread of the virus be contained? How long will it persist? How severely will it impact the global economy? No one has clear answers to these questions. We are in uncharted territory.
So, what should investors do?
It is clear that global growth will suffer in H1 2020. It is also probable that the global economy may slip into recession.
Markets are unlikely to remain bearish for an extended period of time in the present global context of abysmally low interest rates and abundant liquidity. It is important to appreciate the fact that now, globally, markets are moving in tandem. In 2017 we had a global bull market powered by liquidity and in 2018 globally markets turned bearish when the Fed raised interest rates. Again in 2019, when central banks started cutting rates, globally markets did well, in spite of poor global growth of 2.9 percent: a paradoxical situation of decelerating economies and accelerating markets. In 2020, if the global economy shows signs of weakening sharply, the central banks are likely to cut rates. This can support the markets, provided the coronavirus doesn’t become a pandemic and the growth slowdown doesn’t become acute. It is important to appreciate the fact that during previous instances of serious health scares like HIV/Aids, SAARS, Avian Flu, MERS, Ebola and Zika the markets initially crashed but within a year, with the exception of HIV/Aids, the markets recovered smartly. For instance, one year after the outbreak of the diseases the Dow was up by 20.76 percent (SAARS), 18.36 percent (Avian Flu), 17.96 percent (MERS), 10.44 percent (Ebola) and 17.45 percent (Zika). There is a high probability of history repeating.
Since the element of uncertainty is very high, it would be better to wait till clarity emerges. Buying quality stocks will certainly prove to be rewarding in the long run, but investors need not rush-in to buy aggressively. Even though valuations have become relatively attractive, they are not yet compelling. So, investors can buy in installments. Calibrated buying is the ideal strategy. If some positive news breaks out, like a medical solution to the virus, the markets will stage a V shaped recovery. This will warrant aggressive buying. So remain calm and wait for more clarity.
It is very important to continue with SIPs. Experience tells us that stopping SIPs had proved to be big mistakes. So continue with SIPs. A smart investment strategy now would be to start fresh SIPs since high volatility appears inevitable for some time. The benefits of cost averaging will be substantial when the panic eventually subsides. For new investors, the present time is perfect for fresh SIPs. The global economy is likely to get a hit in 2020; but a bounce back in 2021 and beyond appears to be the likely outcome. Whether the markets go up or down in the coming months, SIP investors will certainly gain in the medium to long-term.
In our stock market history, which took the Sensex from 100 in 1979 to above 38000 now, we had gone through many crises – assassinations of prime ministers, serious political instability, BoP crisis, natural calamities, the Kargil war, communal violence etc. Health disasters like SARS, Ebola etc posed serious threats. But now, all these are behind us. This scare too will pass. So remain calm.