The stock market behaviour in the last fortnight has been gut-wrenching by the standards of even the most seasoned market professionals. This level of volatility and fear was last seen during the financial crisis of 2008-09. There seems to be one culprit for all this global turmoil and uncertainty: coronavirus. This made in China phenomenon is now creating havoc across the world. The fear is that the uncertainty surrounding the virus will make a coordinated economic restart even more difficult.
Are things really that bad? How does one invest in times of such uncertainty?
Effects of the new coronavirus on the global economy:
The virus has indeed brought China’s economy to a grinding halt from January to March. China is the world’s leading manufacturer of products ranging from furniture to electronics, and such a major disruption will inevitably disturb the flow of business and manufacturing across the world. At a GDP of $14 trillion, China’s contribution to global growth cannot be understated.
However, now with new cases significantly lower, China is slowly returning to normalcy. The problem now lies outside of China in countries like Italy and Germany that are reeling under the pressure of increasing corona virus cases. The bigger problem though is in the United States that is suffering from the fear of the catastrophic effects that the virus can have on its economy.
The economic situation in the US, however, is quite healthy. Unemployment is at all time lows, and the job market is still very robust. During a recession, there is a spike in unemployment rates. That is so far not the case. Households are much better off in the US, with 30yr mortgage rates hitting all-time lows. Central Banks across the world are taking coordinated actions to stimulate economic growth through the brute force of monetary policy.
What to do?
Black Swan events like corona virus are completely unpredictable and can cause severe, albeit temporary damage to portfolios. Experts across the world are of the view that the first half of CY20 (January- June) could see a sharp contraction in global GDP growth. As a result, we could be bracing for some more volatility in the coming months.
However, market corrections of such magnitude have always provided buying opportunities in hindsight.
The current situation could be a blessing in disguise for India. What India really needs from the outside world is low interest rates and low oil prices - both are now at historically low levels. To play this phenomenon, we like 2 stocks in particular- HDFC Bank and Asian Paints.
HDFC Bank is India’s best-in-class lending franchise. In uncertain times like these, HDFC Bank’s cost of funds will also be significantly lower than competitors, thereby helping it improve its net interest margins. The stock has corrected by almost 15% in the last 2 weeks, providing an attractive entry point.
Asian Paints is India’s largest paints producer. It is one of the few companies to have achieved the feat of growing revenues at 20% CAGR over the last 60 years since 1952. Given that crude oil derivatives are major raw materials, the company offers investors relatively secure earnings growth. In prior periods of low crude prices, Asian Paints’ gross margins have risen by as much as 300-500bps.
Amidst all this chaos, please take a step back and remember that both humanity and markets have faced calamities in the past and have emerged stronger and more resilient. We would like to end by taking solace in a timeless nugget of wisdom- ‘This too shall pass!’
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