The last few months have been challenging for investors. The Nifty fell 26% in FY2020 and it is up 29% over the last 4 months, leaving the Nifty still trading 5% below its 31-Mar-2019 level. Given the economic pain brought about by covid, it is important to understand the reasons for the market strength and to plan how to navigate the coming months.
In the third week of March, the Indian economy went into a long lockdown and we are now going through various phases of re-opening. Many customer facing businesses suffered severely. On the other hand, there are some positives – work from home became a reality, schools started to conduct classes online, digital payments worked, video calling replaced business meetings, lending to companies happened without meetings, direct benefit transfer reached out to the people in need, food & grocery supplies continued, e-commerce came of age. Companies were forced to transition to the new way of working and in many ways discovered a lower cost of doing business. In parallel several businesses have been severely impacted and so are their employees.
While the pain in some sectors is very evident, in the backdrop of the economy being shut for a good part of the last quarter and with companies not having had any notice to plan for such a contingency, we find that the results of some companies have been better than the worst fears of the market. Companies in IT services, foods, home products, financial services and even some of the stronger banks announced reasonable results despite the lockdown. Many of the companies in our portfolio announced decent results and we were reminded of how resilient some of these high quality companies can be, during a crisis.
One of the large reasons for the strength in the market globally is the massive infusion of liquidity from central banks as also the fiscal stimulus provided by governments around the world. The other reason perhaps is that as economies are re-opening up, there is hope of a gradual return to normalcy over the next few months. One of the positives of abundant liquidity is that capital availability for companies in India is also becoming better. We strongly believe that the companies in the portfolio are navigating the storm better than the average company in the economy, and this should translate to them increasing market share over the medium term. There is a fair bit of uncertainty that continues to hang out there in relation to the virus spread, as also fear of the virus and only time will tell how the next several months pan out, but things look positive for our portfolio companies over a 2-3 year period.
Over the last 15 years, we have been investing using a simple principle – focus on the individual company and the valuation. We have avoided responding to macro-economic factors. Over the past several years, we have seen several extraordinary crises – such as the dot com bust in 2000, financial crisis of 2008, and several others before that. Through all these times, many companies have been badly affected, but many other companies also emerged stronger post the crisis. Even in the current times, we will stay focused on individual company performances and valuations. Most companies in the portfolio are being resilient in the storm and performing better than the larger economy. We are monitoring the situation closely and will act if the business case fails or valuations become irrational. As valuations do get stretched in some cases, we will look to sell some of these positions.