Monday, April 6, 2020

Corona pandemic – rebalance your portfolio now

Only when the tide goes out do you know who has been swimming naked.

Warren Buffett
We are now in the 13th day of a three week lockdown in India that is being enforced by the Government to arrest the spread of the global corona pandemic which has gripped the entire world. The speed with this virus has spread all over the world is truly terrifying. But perhaps it indicates how much people are on the move nowadays, and how much more they have to travel regularly in today’s commercial world. As of today more than 90 countries and half of humanity is in complete or partial lockdown all over the world! This is because the most effective way of stopping this virus from spreading is to maintain physical distancing from everyone else.

As I had mentioned in my previous post, lockdowns may stop the virus from spreading but they have economic consequences. Shutting down businesses means people lose jobs. The Government is urging many employers to let their employees work from home. While this is eminently doable for services business, it is hardly possible to implement work-from-home in the manufacturing sector. Even if people do not lose jobs, their income will be curtailed in the short term reducing their purchasing power thus negatively impacting the economy. Governments have announced major fiscal stimulus packages in anticipation of such economic slowdowns. There have been debates in some countries whether the economic cost of a lockdown will be more than the damage caused by the virus itself. That is why the response of Governments around the world to this virus has been different. This is illustrated nicely in the chart below

Notice that India is highest on the stringency scale and lowest on the fiscal stimulus scale on this chart. What does this imply – in short it means that India has the best chance among all these countries to be the least affected (economically) by the virus. And in case India’s containment strategy falls short, the Government has more room to announce more stimulus packages in the future. As of today, when I compare the corona virus numbers, India’s strategy seems to be working - touchwood. Notice also that China which adopted a less stringent policy than India has already started coming out of the lockdown and has started resuming normal manufacturing activities, in less than three months. You can extrapolate this to estimate yourself how soon normal life will start resuming in India.

The United Nations estimates that only China and India, among the large economies, will come out of this pandemic with a positive GDP growth rate. The rest of the world will go into a recession. The chart above certainly gives credence to this forecast. If you also believe that the India growth story - while impacted in the short term - is going to be largely intact in the medium and long term, then this is the right time for you to do the following:

  • Review your portfolio now and rebalance it to invest into those businesses that will be the beneficiaries of India’s growth story.
  • Review your asset allocation. It is likely that your exposure to equities has fallen due to the correction in the stock markets. This is the time to restore your asset allocation by moving some money from debt to equities.
  • Diversify your portfolio as per your own risk profile. Be aware that too much diversification may negatively affect your returns.
  • Keep at least six months of living expenses in cash/liquid instruments. 
  • Finally, stay calm and stay invested.

Having said all of the above, Be aware that this is the time to be aware and alert. There is no room for complacency, because of the possibility that the situation may get worse before it gets better.

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