5 MinsMarch 06, 2020
You may have watched in dismay as your equity portfolio or your equity mutual funds declined over the last two weeks. But you are not alone. Worldwide, equity markets are going through a periodical risk aversion phase due to the outbreak of coronavirus.
Markets are reacting over worries on business sentiments and the health of the global economy. Although the markets have been in the negative zone for the past two weeks, since the virus spread to Europe and the Middle-East, stoking fears
of a global pandemic, it is not the time to panic or lose hope. Take a step back and take a long-term view. Instead of ruing over the recent losses your portfolio may have seen, consider these corrections as long-term investment opportunities.
These types of ‘Black Swan’ events (concerning pandemics) have happened in the past as well. However, none of them have caused lasting damage as far as equity markets are concerned. After an interim correction, markets have recovered
to the tune of 20-80% in the following 12 months (see table). In other words, the interim correction has created opportunities for long-term wealth creation.
Returns during earlier pandemics and returns post 12 months of the outbreak
|Virus Outbreak||Return Period||Nifty 50 ||S&P BSE Sensex|
|(Outbreak period return)||Returns in next 1 year||(Outbreak period return)||Returns in next 1 year|
|SARS||Jan- March 2003||-11.08||86.02||-10.07||88.30|
|Avian Influenza||Jan- Aug 2004||-14.67||47.43||-12.23||51.70|
|Ebola||Dec 2013- Feb 2014||1.60||42.16||1.54||39.50|
|Zika||Nov 2015- Feb 2016||-12.85||22.95||-13.14||20.88|
|Covid-19||Dec 2019 - Feb 2020||-6.93||yet to be known||-5.99||yet to be known|
All returns are in absolute terms expressed in percentage
How does this affect the economy and is this a positive for India?
As coronavirus continues to spread around the globe, few governments have locked down entire cities including Wuhan in China. These measures are likely to cause supply disruption, especially from China, given the disproportionate dependence of
the global economy on Chinese goods across a variety of sectors.
Shock in the form of coronavirus would lead corporations across the world to rethink their business strategies and force them to look at other alternatives for procuring their requirements. To begin with, they will look at tier-2 sources to ensure
that any future supply-side disruption (from China) does not impact their business prospects.
India would be a big beneficiary of the change in business strategy as it offers low cost, an educated labour force and good trade practices in form of regulation and IP rights to fill the vacuum created in the global supply chain, though the
shift would happen only over next couple of years.
The US Federal Reserve on 3rd March 2020 announced a rate cut of 0.5% amid concerns over coronavirus. Though this move may not improve business sentiments in the immediate term, it may help contain the risk-off sentiments. It could lead to a recovery
in financial markets and prevent any default like situations. Central banks across the globe have taken a similar stance and cut rates ranging from 25 to 50 bps.
What should be your way forward in these volatile times?
To conclude, it is impossible to say which way the disease will go. But the number of cases is beginning to decrease in China, while it is climbing in the rest of the world. Experts are looking to see how the virus spreads in the Southern Hemisphere,
which is currently in summer. Hopefully, warmer weather could play a role in reducing the virus’ transmission.
From an investment perspective here are a few steps you can follow:
- Diversify your assets - Do not place all your eggs in one basket. Diversification is key in protecting your portfolio against downside risks. By having different asset classes in your portfolio— stocks, bonds, cash, gold amongst other
things—you can protect your portfolio from losing the value that it could have, had it only contained one asset category. You could consider multi-asset mutual funds that offer investment across equities, bonds, and gold ETFs.
- Don’t panic - During the previous epidemic outbreaks, markets have been volatile for a short period, but have also recovered quickly. So, do not panic and redeem your equity or mutual fund investments.
Instead, use the interim market volatility as an investment opportunity for the long-term growth of your portfolio.
- Stagger your investments - Indian markets are poised to do well in the long run. Hence, this is a good time to invest in the equity markets if you have not already done so. You can invest in small amounts at regular investments using Systematic Investment Plans (SIPs).
Or you could invest a lump sum in a debt fund and transfer small amounts from that to equity funds of your choice via Systematic Transfer Plan (STPs), to invest regularly and achieve your goals.
Also Read : [How long is 'long-term' when it comes to equity investment?]
Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.