Creeping virus: Time to Buy?

Now that you have read the implications and consensus opinion in my previous post, this talks about how I am thinking about the current situation 

What I will watch-out for in next few weeks?

• Whether the rising number of new infection cases, deaths, pressure on healthcare system, along with lesser availability of staple food will create social turmoil? I see it as a high possibility event, albeit it is best to wait to see any evidence. So-far we have been civilized, in India and globally.
• The next few weeks will prove whether the lockdown and ‘self-distancing’ measures that are being implemented succeed in flattening the current exponential path of infection rate. Even if it does, the economic damage it would have caused is immense – latest US weekly jobless claims is 5x the previous high, and therefore increasingly some people (Trump tweeted it too) are wondering if the ‘cure’ (economy lockdown) is more dangerous than the ‘problem’ (virus).  My view is if restrictions are ended too soon, we might see disease continuing to spread rapidly, which will be more dangerous problems later. Remember, as humans we know how to recover from economic recession/ depression, but we have no precedence to combat virus. So while market might cheer the news of no lockdowns, be watchful if we are digging a bigger hole for later. 
• With Wuhan and few Asian countries now restarting operations after 2 months of shutdown, it will be important to monitor if there is ‘second wave’ of infections. This is the biggest fear to my mind, which is not reflected in asset prices, in my view.
• For India, I am keenly awaiting govt. and RBI action to combat this problem. This week, we did set govt. announcing Rs 1.7trn package, mostly targeting bottom-end of pyramid, and broadly composed of existing schemes (only 1/3^rd is new spending). We also saw RBI announcing 75 bp rate cut and providing 3-month moratorium (not loan waivers) on term loans. But we definitely need more, as middle-income, SMEs and corporates are impacted too, and will need some relief on their rents, working capital, fixed charge, etc. We need innovative and unconventional policy announcements, and not the usual textbook approach. This point alone needs another post, but maybe some other day.

The Conclusions

After all the gyan above, which professionals like me are well versed to deliver now, if you are looking to just understand if it is time to buy or sell, and not just hear the politically correct answer, let me share what I am doing for my personal portfolio, which is geared for long-term (note: my professional view is different as objective there is to outperform in the near-term i.e 3-12m on rolling basis). 

After months of patient waiting on the sidelines, in the past two weeks I added 10% weight to Equities at average Nifty level of 8800  taking the allocation from 32% to 42% of my savings on following reasons: 

1. We are in oversold territory (RSI, market depth, no. of index stocks at 52W low or below 200 DMA)
2. Nifty track-record of last 20 years suggests that when 12 and 36 month rolling return is deeply negative or when VIX is at historic highs, the subsequent returns in the next 6-12months have been superior
3. Avg. peak to trough India correction has been 20% in the past 25 years (in US it is 35% in last 150 years), and we are already below that level this week. 
4. Mkt. cap to GDP at 55% in India is hovering around GFC crisis, and 
5. Lastly on my expectations that stock exchanges will be shut in lockdowns and reopen with gap-up only when things normalizes (this point was nullified as Exchanges are classified as ‘essential service’).

As you see most of my assumptions above are sentiment oriented (that might cause short-term pullback), and not really fundamental driven. Despite the fall, the markets are no-where being close to cheap (both on absolute & relative basis), and I believe there is still lot of euphoria around Equities from long-only investors (many compare equity yield to bond yield and justifies higher P/E perennially). While I am no expert on such broader strategy, I aim to now add more to my equity exposure in the next few weeks to take it closer to my targeted Strategic asset allocation (50%). Contrary to the conventional wisdom of 'waiting for the dip' to deploy more, I would rather invest whenever there are 'signs of rebound' and market strength until Nifty reaches 10k. I say this despite some of the skepticism in data I see below:

1. Looking at past market corrections, we are only half-way through compared to GFC (-60%), the Tech bubble (-51%), and 1992 Harshad Mehta scam (-53%) crisis. Not trying to be doomsayer here, but some are comparing current situation to even 1929 Depression, which will be truly unprecedented for Indian markets. So it is better to not be fully invested, and no point trying to be a hero.   
2. NIFTY trailing P/E at 16x is still meaningfully higher compared to 11-13x seen during past major corrections, and against trough of 9x seen during GFC. I am not relying on forward estimates (Nifty forward P/E at 13x, trading almost at historical avg, vs. trough at 8-9x), as no one has visibility and forward estimates are always slow to reflect macro challenges.

1. Asset prices so-far reflect lockdown of few weeks/months and at max 1-2 quarters, but no one is yet positioned for vicious cycle of shutdown-reopen-shutdown existing for next many quarters/ years. We cannot neglect this possibility based on opinions from leading epidemiologists, especially in India, given the population density, ignorance, isolation fear, weaker healthcare system, migrating population, survival need to step out, etc.  
2. The RBI and Finance ministry response so-far has been very tepid, and I fear virus contagion could soon become financial contagion. - we are at risk of credit discipline getting disrupted for retail customer too (just as farmers, micro-finance history), and liquidity drying up in bond markets. The fact that the perceived high-quality Indian banks have corrected sharply with widening bond spreads, implies that there is perceived high level of stress in the system (NPAs could zoom again), which needs to be address soon before it becomes unsolvable.
3. On global equities, I am worried over ballooning Fed B/S (projected at 40% of GDP vs. 7-8% pre GFC) and US federal debt as % of GDP (>100% of GDP), which although provides great support to Equities in the near and medium-term, but it brings perennial risk for the asset class whenever there is regime change, and as US finds it tougher to finance the excesses. Isn't monetisation of the deficit ultimate sin in economics? But who cares to think so long-term these days rite?