Covid 19- – A boon or a bane?

Covid 19- – A boon or a bane?

Welcome back Readers …

Though in last post I have mentioned that next post will be regarding Economics and its interconnection with Investment, but currently amidst Corona (Covid 19) disaster, I thought this article will be more appropriate. Though it can be considered as one of the disasters on the economy, there can still be a silver lining to this dark cloud.

Today’s our topic is Covid19’s impact on stock markets, overall economy and thinking about whether there is a way to use this situation to grab some good bets in investments.

In the last post I had mentioned that various economic factors either directly or indirectly have impact on investments and overall financial world. Here, economics means not only a theoretical subject, but these are fundamental concepts involving which are the factors directly or indirectly influencing the economy of a country and its effects.

Coincidently, the very fresh example of this impact aspect is current Stock market situation due to COVID19 (Corona Virus Disease 19.) The COVID19 currently acting as a

Black Swan Theory which was developed by Nassim Nicholas Taleb.  It comprises the role of ‘hard to predict’ rare events and their ‘hard to measure’ effects currently as they are beyond the normal parameters and expectations in various segments such as science, Finance, history and technology.

The recent stock market ups and downs are the result of various economic factors such as Crude Oil Prices, Slow transactions, in different segments such as Tourism, cancellations of booked flights and their cancellation fees and many more...

All these -factors are interconnected on social, domestic and global level and help economies to keep money moving. That does not mean that there are only adverse effects on all businesses, some segments are even getting blessings in disguise.

As discussed in our last blog, there are some classic examples of term ‘Quasi Profit’ and they are the segments such as FMCG, Hygiene products, OTC (Over The Counter) medicines etc.  These products are getting an overwhelming demand due to recent Corona Virus fear factor.

 There is a Nice Quote:

Be Fearful When Others Are Greedy and Greedy When Others Are Fearful”

- Warren Buffet

 The quote matches with the current situation. The stock market and indirectly all other investment avenues are showing snake and ladder game nowadays. Many people think it’s a risky game of catching a falling knife. Though the risk is involved but the risk reward ratio seems positive. There are some optimistic things as well.

Many stocks such as TCS, SBI have shown corrections though its more than expected but from investors’ point of view it’s a beneficial factor. The term correction means stocks are available at either lower or more precisely at affordable value or the real value to which the stock deserves to be bought by investor.

The current situation, its recovery and after-effects are uncertain and for uncertain time period. Many sectors are experiencing Bullwhip effect, that is even slight change or reduction in retail demand side is affecting at large proportion on supply side.

Here, the skill is how to choose your stocks investments in falling market or uncertain market situations. Merely, a low stock price cannot be a parameter to invest in it. Rather investor should see other rarely inspected factors about the company and its financials.

For Instance, the situation is uncertain and also affecting on the companies’ income but the operational expenses are not lowered they are incurred on routine basis only. Some major expense heads for a company are interests to be paid, creditors and bad debts. In the scenario, the natural actions of most of the companies will be to utilize ‘Reserves’.  This will ultimately be going to hamper investors’ or stock holders’ interest and which will negatively impact dividend payout, bonus shares issuing etc. 

So, in this scenario, one should go for Cash-Rich and Debt-Free company. One of the classic examples of such companies are Eicher Motors. The company is not only debt free but also having short working capital cycle.  This implies, that such companies sell their product before paying the creditors from whom raw material is bought. It also minimizes the risk of the company sustainability in such slow down period as well as from long term perspective.

Another factor to check is products of the company. Every company falls in certain industry and every industry is further segregated in to three broad categories:

There are three major Industry categories:

1.       Cyclical Industries: These industries are sensitive to the business cycles.  Generally, in - economic booms they perform good and in economic doom they perform low.

2.       Sensitive Industries: These are the industries which are sensitive to every small market movement. It means the small change can either positively or negatively impact the industry where it is real or a rumor.

3.       Defensive Industries:  These industries are generally stable in economic ups and downs.

While Investing, one should think and try to forecast that which industry and indirectly which product will be in boom in near future based on anticipated changes as well as Geo-Political and economic circumstances.

For instance, in current uncertain situation, the stock such as Motherson Sumi seems to be a good bet as its products are core. The company operates in auto components and after this slow down, the auto components are expected to get good boost in the recovering economy. Addition to that, from cost and financials perspective, the stock seems to be at correction point.

 In case of products, we can also consider examples of couple of other companies, investment in which can be a wise decision at this point of time.  e.g. Reliance and ITC. Because, both the companies have diversified product portfolio under one roof.  The major plus point of such companies is, the product diversification offers them cushioning against the economic shocks. In case of doom in specific industry, other product / products from different industry can help them recover or keep their financial position and economic condition balanced.

One of the major criteria before investing in such circumstances is management reputation as well as corporate governance of the company.  We have recent examples like Yes Bank and IL&FS which are the self-explanatory and are of the immense importance. These examples clearly show the value of having good corporate governance system in the company.

The term management reputation denotes the history of the management entities such as are they having a background of defaulting companies, their educational background, previous roles in different companies etc. It’s important as these elements reflect the managements’ future intentions many times.

In future blog posts, we will see how to measure stock on financial or other common parameters such as ratios etc.  But at this point of time, amidst Corona (Covid 19) situation, I thought this article will be more useful, so I published it now.

Of course, there are mixed plethora of expression and emotions due to totally unexpected behavior of stock market index and other sector wise indices. Sudden ups and astonishing lower circuit have shaken the financial floor, but for the long-term investors, who can face this uncertain period of recovery, it seems a golden chance to invest but again for the long-term only.

  So, readers, we will meet soon through many interesting articles further, till then stay tuned with ABCD of Investment by Madhura P Karekar, Be optimistic, Stay at home, stay safe and take care