Markets & Corona virus

This post is not about brands or advertising. I had recently started investing. And the complete equity portfolio now is in deep red.

I wasn’t smart enough to exit early on. Now the question for me is – should i absorb losses and exit (fearing recession) or should i stay on with the assumption that market will recover in a year or so.

What do we know so far:

  1. World is shutting down. Today, domestic flights were grounded in India. There are curfews in all major cities.
  2. Not enough people are getting tested. nor do we have the capacity to take care of them once people get infected. so we don’t know the extent of spread in India as of now and can’t have confidence in the governance to manage the situation well. some estimates suggest that the death toll from this epidemic in India would be around 1 to 2 million. This will mean healthcare infra crashing down.
  3. We are atleast a year away from cure/ vaccine. so we are likely to remain quarantined for a long time.
  4. Food, essential shortage will create chaos. govt aren’t prepared for such curfews. chaos and fear will reign.
  5. Without cashflow, how will companies survive? unemployment will rise sharply. and during curfew how are these many unemployed people going to rage on religion and diversionary topics like that? recession looks inevitable.
  6. what could ensure normalcy in a few months? if social distancing actually works and infections are within limts. if the curve flattens out. china is opening up in three months. maybe India too can open up in three months. it will be a slow start but that’s the best case scenario.

The scenarios

  1. Best case scenario: The lock-downs are efficient. Indian heat has reduced virus’ ability to spread. But even then, the high density and low hygiene standards means that the casualties would not be like Germany, but more like Iran. A complete quarantine is a near impossibility in India. so the best case scenario will require public-private partnerships to manage to healthcare load, reduce economic uncertainty with free rations, services etc. Job losses limited to tourism, restaurants, events, aviation, travel, personal services etc. manufacturing coasts along with some months of without pay shut down and govt assistance to companies to remain afloat. services to build capabilities to WFH effectively.
    This scenario will see Indian economy to first suffer slowdown in next quarter and recovery post july perhaps. my portfolio in which case will fall further 5 – 10% (its down by 25% now) and then start recovering.
    I give this scenario a 30% possibility. its an arbitrary figure which i will tweak with new information.
    Its less likely that worse case scenario because – for it to happen, many efforts need to happen by various stakeholders in good faith. Its simply easy for the world to descend to worse case scenario.
  2. Worst Case Scenario:
    massive spread of virus -> spiraling casualties -> gloom & doom -> companies running out of cash -> govt unable to support companies or people -> rising unemployment and indebtedness -> rising NPAs -> finance sector stressed -> demand slump -> Depression -> lack of info/ panic – > chaos -> mob rule and breakdown of social life

Given the right wing forces, rise of misinformation, precariousness of finance sector and of personal finances of most Indians, and lack of info about possible infections – the worse case scenario seems more plausible.

70%. will tweak it with new information.

so overall should take at-least some of my money out of market, since markets will move downwards in most of 2020.

but to make decisions regarding individual choices, i am planning to analyse the companies along following parameters.

<when i get time> damn. WFH actually keeps me more busy. the to-do list never gets exhausted.

anyways, here’s the factors. will update about analysis when i get around to doing it. i must, soon.

Factors to consider

Nature of markets

1. Dynamic systems

Markets are a dynamic systems with many moving parts that affect each other in unimaginable ways. at an aggregate level, the complexity multiplies – it doesnt cancel out. 

so be prepared for events that have asymmetric impacts, for events that would develop quickly and cascade in directions we cant anticipate and events that surprisingly don’t affect a change or affects change slowly over long periods of time. 

how will climate change, right wing political landscape, move to e-commerce… affect each other and the market? 

2. Long term dependence
“Past continues to influence the random fluctuations of the present.” 

So what factors in our past will haunt us in the Corona-virus epoch? what choices now will influence long term prospects of companies?

3. Market turbulence tends to cluster 

Mandlebrot says that markets typically have periods of high volatility with long lulls. Right now we are in the high volatility phase. we are yet to see more turbulence. 

4. Variable speeds 

One, market movements will be ‘fast’ now.
Second, some industries will bottom out now. some others may take years yet to bottom out. Need to figure out which ones will bottom out when. 

5. Emergence

What would emerge from current situations – what new organisations might emerge? new civic minded coalitions? religious extremists seeing corona as god’s will? new

what new habits and behaviors will emerge? surveillance and open access to health records? Increased hygiene routines? 

Increased legitimacy of online living – gaming, AR, e-commerce etc.

Global factors.

1. State of information.
If stock exchange is an exchange of information, we need to have confidence about how much we know. if people feel that there is lack of transparency and control, the market will remain volatile. 

Modi enjoys a messianic appeal. He can use it to reduce the volatility and showcase control and transparency of key information relevant to markets.  

Crisis is a good opportunity for the govt to embrace facts for a change.

Will it happen? i give it 50-60% probability. the event of 22nd march with claps is a test of his charisma. more mobilising will follow at war footing. some of it i hope for the good. and as the situation gets worse, hopefully govt will be forced to work in partnership with private companies and as such make relevant data public. fingers crossed.

2. War-time economy doctrine: who benefits, who suffers?

Whose infrastructure/ resources will the govt need to commandeer to say manufacture ventilators, test kits at a war footing? which hotels would the govt want to convert into makeshift hospitals? 

3. Crisis are the moments in history when great changes take place.
Will authoritarianism take hold or the ensuing tragedy of millions of deaths lead to stronger democratic institutions and a new political force? will the world take left or right?

4. Global shock
US goes into recession, Oil price shock, weakening rupee, supply and demand shocks due to disruption.

refineries, airline industries are disproportionately affected by the oil shock, demand shock.

as the world re-orients itself around corona virus – it will require new companies that can help the health workers work more efficiently, create services for the affected etc. 

A whole new economy is yet to emerge.

Company specific factors

5. Financial strength to weather the disruption for a year

the ones with ample cash war chest. the ones not depending on short term cash flow to survive. the ones with low amount/ no debt. the ones with no/ little obligation in dollars or other foreign currencies. 

6. Dependence and risk to work force’s health

well, this affects everyone. for whom does it affect less? service sector yes.? but where is the asymmetric advantage highest? mostly new-economy digital services, but which ones?

7. dependence on raw material whose supply might be affected

well everything is made in China. we might see China slowly get back to business in the coming months. but would some Indian companies take this opportunity to grow capacity and grow? Govt is pushing for electronic component manufacturing and pharma ingredient manufacturing. There are some opportunities here in the long term. 

but as the situation gets severe in India, it might actually be a very difficult scenario. local supplies, if disrupted, would be problematic for most manufacturing companies. 

we are likely going to see severe disruption to manufacturing in the coming months.

Consumer related factors

8. dependence on consumers whose demand is affected

As pandemic spreads, companies will lose employees, people might lose jobs, bread earners might die. Great gloom will spread. Consumption will go down. we are entering recession, no doubt about it.

Outdoor social economy will collapse. 

rentals collapsing in europe where airbnbs were reducing the rental supply. with corona, low tourism so property owners are moving to rentals. real estate has been fucked since a few years. this will be death knell for quite a few real estate players. but yay! i can begin to imagine owning a house one day. if i manage to keep my job/ and if not, manage to make enough money to save some. 

In the medium term though, social distancing means a full stop to consumption at restaurants, pubs etc. but the rent payments, bills won’t stop. but home deliveries are booming. maybe home deliveries will start charging premium as panic grows?

Work from home services are booming – conferencing, collaborations tools, broadband, telecom etc.  

Entertainment at home is booming – OTT, gaming etc 

People are getting bored at home – will they end up spending money on fashion online? boom or bust for myntra?

9. Balance of capital

Rich people with enough money on hand and strong enough cash flows but too worried about volatility in market, might end up spending it on luxury items? luxury cars, real estate, art, cosmetics etc. 

the vast middle class might return to FDs and public bank deposits. and away from MFs, stocks etc. so large established banks like HDFC might gain somewhat? the upper middle and middle class will save as much as they can. 

the lower class will feel the disruption the most. social distancing is already playing havoc on daily wage earners and even house helps. in rural areas the distress might get acute – constrained cash flow, fewer opportunties and gloom of corona deaths. 

They might find succour in religion (dangerous tilt to right for the nation?), alcohol, small indulgences (snacks) and cultural identity based events/ activities?

Alternatively, will the urban rich/ upper class flee to hinterlands creating new economic opportunities in the interiors?

The Mad World of Monopolies Over Brains

Microsoft bought semantic machines.

Google, FB etc keep buying smart companies all the time.

A handful of global companies keep buying smart companies before they can get a product out to the market.They are essentially creating monopolistic moats over not just cutting edge intellectual property, but also the intellectuals – the men and women capable of creating/ leveraging new technologies.

So many startups now start with the end in mind, the vaulted ‘exit’. What happens when all the technological advancements get concentrated in fewer and fewer hands? The only anti-dote to Marx’s dystopia of ever accumulating capital was the intellectual capital that allowed anyone to give it a go with limited risk and succeed. Is that anti-dote of intellectual capabilities relevant any more?

Any body can learn to code, etc. But can everyone access the infrastructure and the necessary accelerating feedback loops to improve as fast as these few companies can? That pace of accelerating innovations is the new Capital for 21st century.

If we don’t want an increasingly unequal world, we will need to view this capacity to rapidly innovate as a capital that needs to be seen similarly to other capital assets – land, machinery, channels of access to consumers.

Which means, it is time for regulations. We can’t let ever fewer investors and companies to corner the ability to rapidly innovate.

This is essential. Unlike 15 years ago, when a zukerberg could code out of his dorm and build an empire. Now another zukerberg could code just as well, but if his idea & code is any good, it will either get copied by these juggernauts or get bought early on. Look at how FB is copying snapchat to its death. It is not a level playing field anymore. A successful digital company now will require a war chest of billions. There are investors ready to fund these war chests. But the problem is, that these investors are same few folks from California (and one notable Japanese guy).

There is no Nigerian, no Indian, no Brazilian, no Greek, no Swedish….(and a 190 countries later) person among those few people who control the new engine of human innovations.

A side effect of this narrow competition is the poverty of ideas that the best minds are working on – google glasses, automated vehicles, AI assistants … are these the biggest challenges for the humanity? As Climate change, growing inequality and rising xenophobia tear the world apart, should the people who can create the infrastructure of the new world be spending their times on elitist pursuits?

It is not difficult to copy them and become the new age capitalist. However they have created a high-entry barrier by turning it into a mad game of bluff. Their tactic is to value companies at ridiculous valuations. The valuation is divorced from reality and based solely on the potential of possible monopolistic leverage. Naturally, most sensible people, stay away from this capricious game.

These people are feverishly gambling with the intellectual capacity of humanity. It is a mad mad world. They need to be stopped if we want a better world.