Financial Crisis, 2008 vs COVID-19, 2020

What does this mean?

COVID-19 correction is similar to what we had during the Financial Crisis 2008. Certainly yes. That was the year when investors actually made money in quick time, mostly next one year. Entire economy came back on track in a short time. Companies started performing better every quarter.

Is this the best buying opportunity of the decade?

Do not speculate. See what India earned during last fall, the Financial Crisis 2008. Nifty cracked down from 6357 to 2252, around 64.57%. What happened later? Nifty earned more than 100% returns in just one year. Market fall happened due to COVID-19 resembling the 2008 Crisis.

So what will change the market mood?

Clear visibility of containment of corona cases, incremental incidents falling and the spread of the epidemic reducing. While government and central bank actions will serve as palliatives, the stock markets, currently gripped with fear, will want to assess the overall damage to the economic activity and demand, and this will be clear only once there is a tangible improvement in the corona situation.

Until such time, however, markets may continue to be volatile and susceptible to daily news-flow and hypothesis with respect to the pandemic, a stage which possibly traders and arbitrageurs will dominate.

Which stocks can benefit?

Certainly this is an opportunity of the decade. It doesn't mean anything we touch will turn into gold. We need to pick stocks which will run faster than others. This is a serious fall we are undergoing. Still there is no signs of recovery but we can pick those companies which can benefit investors during this volatile market.

What can Indian investors expect?

Economic recovery and earnings growth in India are likely to be a bit derailed, as the corona scare has a real impact on economic activities in India - travel, tourism, hotels, manufacturing and services having global dependence and now even the larger corporate sector starting to scale down operations and productivity with work-from-home contingencies triggered.

Moreover, structural issues still persist, although improving on the margin. The financial sector has been rocked by one scandal after another, shaking the confidence of investors as well as lenders. For a sustained economic recovery, it is imperative that credit growth picks up.

Positive triggers for India

The recent fall in oil prices is beneficial overall for India's current account, as we are a net oil-importing country. Even if a settlement is reached among the oil majors, it looks pretty likely that the average oil price for this year will be lower than the previous year. Though one must keep in mind that very low oil prices would also mean a lower global economic growth which could adversely impact India's exports, remittances from overseas as well as FPI flows.

A lower current account deficit and lower imported inflation will provide the necessary legroom to RBI to be more liberal with monetary policy. The RBI is committed to maintaining sufficient liquidity, and given the prospects of a delay in economic recovery, a rate cut in the near-term cannot be ruled out.

Global central banks are fast acting to provide liquidity, through rate cuts, purchase of bonds and now a cut in reserve requirements (China). This should hopefully provide some cushion in the current volatility and reduce panic among investors.

Valuations of Indian companies were on the higher side for quite some time, given (a) lack of earnings growth and (b) flight to quality large caps, making a part of the market quite expensive. The recent fall seems to have corrected valuations of several companies, presenting an attractive entry point for long term investors.

And unlike in the previous market falls, the earnings cycle of Indian companies (prior to the Corona shock) was on a path to recovery and not peeking out. The current re-rating of the market is factoring in the possibility of some growth being shaved off owing to the virus effect; but post that, markets will look for growth starting to recover towards the second half of the coming financial year.

Conclusion

Market is uncertain. But returns can be certain if investment is done cautiously in coming time. This is the best opportunity investors can get. Wait is over now. Time to invest and get good returns in quick time.