Sunday, March 22, 2020

Corona virus – what to do with your portfolio now

Be Fearful When Others Are Greedy and Greedy When Others Are Fearful.

Warren Buffett
As I write this post, we are in the middle of a ‘Janata curfew’ – a voluntary lockdown in the entire country, initiated by Prime Minister Modi to impose social distancing on the entire population. That and washing hands frequently are the only two weapons we have against this global pandemic at the moment. This virus is unlike anything that humankind has ever seen before. It spreads so rapidly that it can overwhelm entire healthcare systems in a matter of days. We are seeing that scenario being played out right now in Italy and Spain. The ‘Janata curfew’ is therefore to be treated as a trial run to ensure that we do not get to that point as a nation.

However lockdowns have mega side effects, especially economic ones. The benchmark Nifty has already fallen 30% from the top in anticipation of a slowdown of the economy. If this pandemic does not appear to be coming under control anytime soon, the index could fall even further. PM Modi has also setup a task force under the leadership of the Finance minster to take stock of the situation and recommend appropriate stimulus actions. This is a good move unlike some other countries which have announced various kinds of bailout packages, which appear to be knee jerk reactions. We need considered measures to stimulate the economy at this time, not knee jerk announcements. So what will this task force recommend? Here are the possibilities in no particular order

  • Doles – Daily wage laborers and contract workers who will lose their daily wages due to this slowdown may get some money credited directly into their bank accounts to help them sustain through these difficult times. Some states like Delhi and Karnataka have already announced the same.
  • Interest moratorium – Public sector banks may be asked to give one or two month moratorium on interest payments for loans availed by their Customers. Private sector banks will have to match this in the interest of public sentiment.
  • Deferred payments – Public sector insurance companies may be asked to defer policy premiums by one or two months without lapsing the policy. Private sector insurance companies will have to match this in the interest of public sentiment
  • LTCG suspension – Long term capital gains tax on equities is at 10% whereas Short term capital gains tax is at 15%. The difference of 5% is not enough incentive for investors to stay invested. Hence LTCG on equities may be removed or suspended in order to encourage investors to stay invested and reduce the volatility in the capital markets
  • STCG increase – Anticipating a bounce back rally in the near future which many traders will make money in the short term, the Government may increase STCG temporarily to benefit from this situation. The fact that the Government has not yet reduced prices on petrol and diesel despite international crude prices crashing makes this a real possibility.
  • Increased spending – Government may announce increased spends in key infrastructure sectors such as highways, railways, ports, transportation, health, education and housing
  • Interest rate cut – RBI may cut long term interest rates in order to make it cheaper for businesses to borrow capital and revive their growth
  • Tax cut – Government may announce an income tax cut especially for the middle class in order to put more money into their hands.

What to Do?

  1. All equity investors have taken a significant hit on their portfolio in the past few weeks. This is now a good time to review your portfolio and replace stocks which have fallen significantly with those that will benefit from the above stimulus announcements. Some educated guesswork is required no doubt in this process, but sectors like pharma, healthcare, consumer goods and chemicals are good choices at the moment. Making good picks from these sectors will help you recover your portfolio loss quickly when the bounce back happens. 
  2. This is also a good time to review your asset allocation, which has become distorted due to the correction in the stock markets. Moving some part of your debt allocation to equities in order to restore your asset location is also a good idea at this time.
  3. If you are invested in credit risk funds or corporate bond funds you need to be extra careful. The slowdown may turn into a recession if the pandemic continues for a few months which in turn may trigger defaults. Overnite funds and/or Gsec funds are the preferred debt instruments for now.
If you still have questions or doubts, reach out to your SEBI Registered Investment Adviser who will be guide you through this patch of global turbulence.

No comments:

Post a Comment