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How Can Investors Navigate Coronavirus Led Stock Market Crash
how can investors navigate coronavirus led stock market crash

How Can Investors Navigate Coronavirus Led Stock Market Crash

#How Can Investors Navigate Coronavirus Led Stock Market Crash

A virus whose impact was initially brushed aside by stock markets across the world. It was initially thought to be just China’s problem and the markets across the world kept marching higher.

Soon the bright picture of a capitalist world turned upside down as cornavirus cases spread to other countries. This doom and gloom reflected in the stock markets across the world with S&P crashing 30% in just a few days.

Indian markets too caught the virus and NIFTY50 swiftly correcting from 12430 to 8555 levels (a sharp 31% fall in the sensex).

In fact the fall was so sharp that it felt like taking a thousand bullets in a fraction of a second.

Seeing the sharp decline, US Fed slashed benchmark interest rates by a full 1% while Bank Of England slashed interest rates to all time low of .1%. All this was done to calm the markets but this did not stop the panic.

Have the stock markets bottomed out or this is just a rally which will trap the value investors hunting for bargains? Could the markets crash another 20-30%?

Well, no one could say for sure but with so much uncertainty out there what should be our strategy as an investor? How can investors navigate coronavirus led stock market crash.

Before we discuss all this it is important to know if facts point out to a recession due to coronavirus.

This is an evolving situation and our investment strategy should consider the worst case scenario as well.

Can Coronavirus Lead To A Recession?

Until January no one felt Coronavirus could open the gates to a recession. Now with almost every country closing its borders, shutting down restaurants, malls and restricting mass gatherings a lot of companies in various sectors are running for cover.

Airlines and tour and travel companies seem to be affected the most.

In fact, airlines already is a low margin business where companies usually carry a lot of debt. If no body is travelling, and governments are directing air carriers to waive cancellation charges, there could be a series of loan default arising from the overly indebted companies.

In fact this is the outcome we don’t want to end up with. Due to low interest rates across the globe the world is awash with cheap money.

In the last decade corporate debt has increased close to 10 trillions dollars in US which essentially means that US corporations have raised a lot of debt by selling bonds to investors. Low interest rates only added to the debt binge.

Now coronavirus which has come like a shocker disrupting businesses already reeling under massive debt burden could eventually lead to a lot of debt defaults.

It can also lead to a lot of firing of employees by corporations. Over the course of next few months there are chances that many such corporations could begin to default on their loans.

We will soon come to know if there are mass firing of employees in aviation, hospitality and other industries. In fact this mass unemployment seems to be happening already.

Whether such a scenario will play out or not will depend on the monetary and fiscal support from central banks across the globe.

No one can say for sure what lies in the future but one can certainly assess the debt levels and see if there could be trouble ahead.

How Can Investors Navigate Coronavirus Led Stock Market Crash?

No one knows whether coronavirus can lead to corporations defaulting despite government support.

If governments across the world are able to help indebted firms during this time of crisis then there is a chance we may not have a financial crisis sprialling out of control.

But if the impact of coronavirus does lead to debt defaults by companies then we may end up with a severe financial crisis.

As investors, the future is unknown but in this uncertainty we must find our way. We have to do things that are in our control. Here are some things that I am doing as an investor:

1. Keep Yourself & Your Family Safe

First thing first. Our health takes priority over everything else. Only if we are alive can we enjoy this world.

Therefore take all necessary precautions to protect yourself and your family from the onslaught of coronavirus.

Above all do not panic or fear. After all most things in our lives are out of our control. Therefore we must do what we can and stop worrying about things beyond our control.

2. Overcome Panic & Keep Calm

With stock markets across the globe declining 30% and more in just around two weeks, the paper losses in individual stocks can be even higher.

It is very common to panic and take hasty decisions in such a scenario. Panicking is normal but taking impulsive decision out of fear is something an investor should not do.

Before you panic just look at the picture below.

From the reference point of an observer viewing the Milky way, our life, our emotions and our circumstances on EARTH seem insignificant in the grand scheme of things.

So let us be calm in the midst of this coronavirus led storm that is affecting our health and our finances. Only with a peaceful mind can we take better decisions.

milky way galaxy

3. Don't Sell Your Shares In Panic

Before selling a share in times of extreme fear ask yourself the following:

1. Does the company have a good management?

2. Did the company report profits and good cash flow during 2007 – 08 financial crisis?

3. Is the company carrying a lot of debt (debt to equity and interest coverage ratios can be used to gauge this)?

4. Are cash flows from operations positive and cumulative cash flow from operations over say 5 years or more greater or equal to cumulative net profit over the same period?

You can read more about cumulative cash flows from operations and cumulative net profit in my post on PC Jeweller (refer point 1)

If the stock you are holding fails on these parameters then it may be wise to sell it as this is not a time to be invested in heavily debt laden companies.

If the stock passes on these parameters then chances are you may be holding on to a good stock.

Especially if you hold stocks of companies which enjoy monopoly like IRCTC (Indian Railways Catering & Tourism Corporation), it may be wise to just hold on to the shares.

After all, if you did not sell the stock when it was expensive at a PE of 100 or more then there is no point in selling it now.

4. Make A List Of Good Companies That You Would Want To Buy

Last two weeks have been really very rough for stock markets across the globe. The fall in stocks has been gut wrenching.

Each day in the market feels like a day in the war zone with negative news pounding from every direction.

Despite this we must endure the pain and persevere. It is a good time to quickly make a list of great companies one can buy.

No one knows if the stock markets will bottom out here. If at all companies default and financial stress reaches the banks then definitely markets can fall further.

In this uncertain outlook what lies in our control is the process to find out stocks of good companies one would like to own.

Look for companies with negligible debt, return on capital employed > 20%, strong cash flow from operations and having a long runway for growth.

An investor should spread out his/her investments across different sectors.

At all costs avoid companies with large amount of debt at this point in time. This can be gauged using two financial ratios (debt to equity and interest coverage ratio). You can read about them in my previous post here.

One interesting fallout from Coronavirus can be that multi-national companies will look at Indian companies as an alternative to China.

One sector that I know of is the chemical sector which stands to gain as global corporations look for diversifying their supply chains and not relying solely on China.

This can be a major lesson from the coronavirus fallout.

5. Keep A Cash Buffer & Buy Using Staggered Approach

In case you have cash to invest then this is just the beginning of a wonderful opportunity to accumulate stocks of good companies.

In case you are already 100% invested in stocks then you should remove financially weak companies with lot of debt from your portfolio. Don’t hesitate to book losses in such companies.

You can then use this cash to invest in financially sound companies.

When there is so much uncertainty then it makes sense to start buying your favourite companies that begin to show value at a particular price.

In fact, if Coronavirus leads to a financial crisis and defaults by companies then stock markets may go down by 50 – 60% from the top.

If this happens a lot of great companies may be available for single digit PE ratio (especially in smallcap and midcap space).

Therefore keep increasing your allocation to stocks as markets continue to fall. Don’t invest all your money at once.

Points a, b and c below provide some parameters that can help you in deciding how to increase your allocation to stocks.

a) Look For Fundamentally Sound Companies Where Promoter Is Increasing Stake

Once you have made a list of fundamentally sound companies, you need to keep a tab on promoter buying shares from the market.

If in a sharply falling stock market, the promoter of company has started to nibble at shares then definitely it is a positive sign.

Therefore we must follow the promoter provided the company you have chosen is fundamentally sound. In fact as the stock declines more, this buying should only get more aggressive.

This is when we can also start building a position in the stock. I often rely on this technique for entry when the stock price is falling due to panic.

After all the promoter knows much more about the company then us.

b) Look At Historical Lows Of Indices To Decide On Increasing Stock Allocation

As I am an investor who invests in smallcap and midcap stocks, I am also looking at the NIFTY Smallcap index chart which gives a good insight in to possible entry points.

NIFTY Smallcap index has fallen from a high of 9656 to 3795 as of 19th Mar, 2020. If the stock market continues to fall then smallcap index may soon hit the levels seen in Aug 2013 of 2508.

cnxsmallcap100 index chart

In my opinion a fall below 3000 level may offer great opportunities in small cap space. Therefore an investor can also keep a tab on historical index levels to decide on increasing stock allocation.

You can repeat the same process for midcap index or other indices of your interest as well.

c) Use PE Ratio Of The Index To Decide Your Stock Allocation

PE ratio of NIFTY 50 measures the price to earnings ratio of the NIFTY 50 companies. A look at the PE ratio of the index can help us in knowing if the stock market is too expensive or offering deep discounts.

Usually a PE value above 22 is considered expensive. Recently the value of NIFTY 50 PE was hovering around 28.58 (very expensive and heated stock market) but has now drastically fallen to 18.63.

You can monitor the NIFTY 50 PE ratio provided by trendlyne. In the aftermath of 2008 financial crisis the PE ratio of NIFTY 50 had fallen to 10.99 by October 2008.

This was a rare occurrence which meant that stocks had been beaten down way beyond their intrinsic value.

In my opinion a PE ratio of 18.5 and below is definitely a signal to start buying stocks. As an investor one can keep increasing allocation to equity as this ratio keeps declining. 

A value below 14 offers very good opportunities for long term investment followed by handsome returns on investment.

6. Listen To Conference Calls Hosted By Companies

Once you have made a list of companies in which you would like to invest then it will be advisable to listen to their conference calls.

For example, I recently received a notification stating that Alembic Pharma will hold investor’s conference call to discuss the impact of COVID-19 on the company.

I did listen to this conference call as this helped me in knowing the impact of COVID-19 in the pharmaceutical industry. Some of the points I gathered from the call are:

1. Supply of raw material for pharmaceutical industry, mainly API (Active Pharmaceutical Ingredient) from China is returning back to normal.

Pharma companies were earlier fearing a shortage of raw material for making medicines due to plants shutting down in China due to coronavirus.

2. Indian government is fastracking permissions for API manufacturing in India now. API manufacturing may provide Indian companies with more opportunities.

3. No visible impact on pharma exports to US as of now

4. There may be some re-shuffling of export dispatches due to flight cancellations

The reason I have mentioned these points is that by listening to conference calls of companies, an investor can get to know the prevailing situation on the ground to a certain extent.

This only helps us in making more informed decisions related to our investments

You can go to researchbytes and listen to recorded conference calls of Indian listed companies.

Summary

Coronavirus will end up having a huge impact on human health and our finances as well.

The governments and central banks around the world are doing everything possible to ease the blow.

Despite the gloom and doom everywhere, we need to take first precautionary measures for good health and also look at this as a great opportunity for building a stock market portfolio.

In fact if there is a financial crisis then instead of panicking investors must use available cash to build a portfolio of financially sound companies and weed out poor companies.

I hope this article will help the investors in riding the storm that we are in. Don’t despair. Our ancestors survived two world wars, economic depression of 1929 and what not.

Keep your mind strong and steady and do what is necessary.

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