Invest systematically and iron out volatility triggered by disruptions such as the Covid 19 pandemic
The rapid spread of the novel coronavirus (Covid 19) across the globe has got investors worried about the impact this will have on the financial markets, especially equities. In such a situation, the question on the minds of investors is whether to stay invested or exit.
Equity indices worldwide, including India, is having a tumultuous 2020. The Dow Jones and FTSE 100 indices tanked about 26 per cent and 31 per cent, respectively, while emerging market indices RTS (Russia) and Bovespa (Brazil) plunged 38 per cent and 37 per cent, respectively, on year-to-date (YTD) basis.
The story was no different back home with the Indian benchmark indices (S&P BSE Sensex and Nifty 50) down 17 per cent and 18 per cent, respectively, YTD. On March 12, 2020, trailing the manic global sell-off, the domestic benchmark indices saw their biggest one-day point fall with the S&P BSE Sensex down 2919 points and the Nifty 50 declining 868 points, giving a massive jolt to investors' confidence. On March 13, domestic indices hit the lower circuit when the market fell another 10 per cent, prompting a halt in trading for 45 minutes, though by the end of the day it closed in the positive.
Varied Sectoral Impact
The coronavirus outbreak has the markets in a tizzy, but an assessment of sectoral macros shows a mixed picture. CRISIL's assessment of the economic casualty of the outbreak, especially for India, as things stand, shows that Covid 19's impact will be a mixed bag.
With import volumes reducing, domestic manufacturing sectors that are highly dependent on imports from China, such as ceramics and plastics, are expected to benefit. Moreover, India's steel, paper, leather and textile, readymade garments segments have a window of opportunity to expand exports, as China's own exports from these sectors account for a sizeable pie in global trade, which has been impacted due to the Covid 19 outbreak.
The interim impact of supply disruption is likely to be neutral for sectors like auto components and pharma bulk drugs dependent on supplies from China. But a delay beyond 2-3 months due to continued low production or an extended lockdown, would impact Indian corporates severely.
Consumer durables, electronics, and solar panels would be the worst hit, as they depend heavily on imports from China, with no immediate alternatives available. In addition, some impact on exporters of products such as cotton yarn, seafood, petrochemicals, gems and jewellery is inevitable, given that China is among the biggest markets for these products.
While everything looks like doom and gloom, investors should note that markets, especially equities, tend to be volatile in the short term. Such bouts of negativity have been witnessed previously during health scares such as swine flu (2009) and pneumonic plague (1994), and economic downturns such as the global financial crisis of 2008 and the Harshad Mehta scam of 1994.
Sharp corrections in the equity markets often result in investors taking hasty investment decisions such as exiting the market by redeeming investments, or mimicking the actions of a larger group (herd mentality: everyone is selling, so let's sell, or stopping investments). These, however, are not prudent ways of investment management. Such movements derail the long-term financial goal planning of investors and affect their risk-return profile.
Investors should avoid falling prey to emotional biases (fear) and should instead stay invested for the long term to derive optimum returns. A look at the rolling returns of S&P BSE Sensex starting with a short horizon (one-year rolling basis) and the long term (15-year rolling return) on a daily basis, shows that returns in the shorter horizon are more volatile, and this smoothens out as the investment horizon increases, with the 15-year period yielding the most stable returns. (Data used was of rolling return averages for the June 1994 to February 2019 period, even though the underlying BSE index values pre-date that.)
Market corrections will come and go. But it is important for equity investors to stay invested for the long term. By doing so, investors will also stay focused on their long-term goals such as retirement planning, and children's higher education and marriage, among others. Systematic and disciplined investment is the key to achieve this. Systematic investment plans (SIPs) are an efficient and easy way to invest in equity mutual funds over the long term.
Warren Buffett, the legendary investor, once said, "Someone is sitting in the shade today because someone planted a tree a long time ago."
The fruits of investing in equities ripen in the long term. Investors can follow this sage advice and stay immune to short-term volatilities in the markets.