March 2020: Be greedy when others are fearful

The Nifty fell 23.2% in March 2020, making it one of the largest declines in a month in Indian stock market history as fears about the spread of Covid-19 ravaged markets across the globe. The Nifty is now down 30.8% from its peak in January 2020.

The spread of Covid-19, the disease associated with the novel coronavirus, across the globe has ravaged stock markets across the world, largely on account of the rapidly increasing case load and the response to this pandemic, which has largely been that of social distancing and lockdowns in different countries including India, in order to ‘flatten the curve’ and allow health care systems to cope with the case load. This is likely to cause severe damage to economies across the world and the Indian economy is also expected to suffer collateral damage. At its lowest point recently, the S&P 500 was down 35.3% from the peak while the same number for the Nifty is 39.6%. What is spooking markets globally is the exponential nature of the rise of new cases being witnessed across Europe and the US, as also the fact that the suggested course of action, which is social distancing and lockdowns, are likely to have a severe impact on economic growth across the globe.

While the steep fall in the US market was preceded by a dramatic rise in the S&P over the previous 12 months, in India’s case the stock market has been treading water for quite some time and the high of roughly 12,400 on the Nifty was up only 18% from its level as on Dec 31, 2017. The dramatic fall in the Nifty is therefore a bit surprising and perhaps represents immense fear in the minds of market participants, who want to sell first and think later.

With the global economy stalling in the face of the lockdowns being implemented in many countries, many companies are uncertain about the future. Some sectors of the economy like travel, tourism, hospitality and others are likely to see a severe impact as they are directly affected by the current problem and many others are likely to have collateral damage. Companies with strong balance sheets and a strong competitive position (many of our portfolio companies fall into this category) are likely to take market share from their competitors in this stressful environment and will also likely benefit as and when demand comes back.

The question then becomes – What should be our approach to investing in these fearful times? The India VIX (Volatility Index) which is widely considered as a barometer for fear (higher the VIX, higher the fear factor in markets) recently touched an intra-day high of 86.6 in March 2020. The last time the India VIX touched such a high level was during the 2008 crisis when it touched a level of 92.5. For the S&P VIX the intra-day high touched in 2020 is 85.5 compared to 89.5 in 2008. It should be noted here that the median of the S&P VIX over the last several years is around 16. As can be seen from these data points the level of fear in markets is exceedingly high. From the valuation perspective too, the price to book value of the Nifty at its lowest point in March 2020 is 2.17 while the same number at the bottom of the 2008 bear market was 2.12. Back in 2008 too, it seemed that the financial system as we knew it, was potentially at risk of falling apart – so one can draw a parallel with what is happening now in terms of the economic slowdown linked to Covid19. At this point we are reminded of the wise words of Ben Graham (considered the Father of Value Investing) – “Be fearful when others are greedy, and be greedy when others are fearful”. So, at a time like this when there is widespread panic in markets because of the fears surrounding Covid-19, it behoves us to be greedy when others are being fearful. The experience of the crisis of 2008, gives further strength to this hypothesis because with hindsight, 2008 proved to be a great buying opportunity.

It is difficult to say at the moment, how long the fear surrounding Covid-19 is with us. It could be a few months or it could take longer. Meanwhile economic stimulus from the government and the RBI in terms of interest rate cuts and deferment of interest for borrowers, is expected to provide some support to the economy. What is important to remember is that we and our investors are planning to use the proceeds from our portfolio over a 10-20 year period, and our orientation towards our equity portfolio should factor in that kind of a time frame. It is also important to remember that a stock is a claim on the earnings of a company into eternity, not just for the next month or next year. So, while in the short term, the market is a voting machine, in the long term it is a weighing machine. The value of our stocks in the long term will eventually be determined by what the underlying companies’ earnings are going to be in the long term, and not by what price panicky investors are placing on them in the short term. Some of the prices that we are seeing for our portfolio stocks are truly mouth watering from the long term point of view. As such, this is a great opportunity to add money to your long term portfolio of equities.