Mar 24, 2020

Is It The Right Time To Buy Stocks After Coronavirus Stock Market Crash Or Not? Looking From PE Ratio Angle

Stock markets have declined in excess of 30% due to Coronavirus stock market crash in India and world over. Bluechip stocks like HDFCBANK have also fell more than 30% that is an expectancy of EPS coming down by same percentage points. Everyone must be wondering regarding what to do after crash in stock market due to COVID-19. This piece would also look into what’s in store for stock market investors in near future and if and how to take benefit of Coronavirus stock market crash. In our new articles we will also discuss about what stocks to buy post Coronavirus market crash and when to buy.

Let’s analyse this purely on maths. Suppose, the companies‘ have to shut operations due to Coronavirus effects for one quarter i.e. 3 months; in that case the sales and profits will decline by a quarter of what they are on annual basis. Take example of HDFC BANK; say it is clocking growth of 40% annually then this number will decline by 10% and the new annual growth rate will be 30%, so according to this calculation the PE should decline by 10% and not 30-50% which has been happening with most shares.
Also, unlike recessionary situation, the companies will save on many variable costs like electricity, transports etc. depending upon the nature of the business of the firm. These will cut down on operating expenses side offsetting some of the erosion on the profitability side.
The government will also provide tax benefit and other soaps for most sectors of the economy that are likely to be affected due to novel COVID-19 virus crisis and lockdown post its spread.

Some assumptions:
This analysis assumes the nationwide lockdown to be of 3 months or less.
I also assumed that the growth of companies is evenly distributed over 4 quarters.
EPS/PAT does not have direct perfect correlation with Sales as many operating factors could influence it y-o-y in different magnitude.
Investors use PE, EPS and market price of the stock as prime factors of importance while considering investment.

Mar 22, 2020

Coronavirus/novel COVID-19 Pandemic Crisis and Your Stock Market Investment

Effect So Far:
For last few weeks the world has been facing a pandemic crisis due to Coronavirus/COVID 19, which began in Wuhan city of China and has spread through out the world, in almost all countries.

As of now about 3 lacs have been infected with the deadly virus and 15,000 have died.

The pandemic situation and its imminent and potential recessionary effects on the economy has caused the market to anticipate decline in topline and bottomlines of the businesses and caused massive and unprecedented fall of up to 30-40% in global stock markets within a matter of few days.

The world markets started crashing from about 15/17 February 2020 and over the span of next 4-5 weeks they witnessed jaw-dropping gyrations before settling down 30-40% lower from where this downward journey started experiencing circuit-breakers halts in trading in most stock markets.

The base commodities such as crude oil, copper etc. also tanked 30-50 per cent over the period with crude oil nosediving 50% which was already having a negative outlook

Should you buy stocks now?
This is in fact not a question asked for one situation. This question is same that is asked on any good or bad day, "What is the right time to buy?". And the answer also remain same, "All time is good to buy stocks."
The investor who sees markets falling, a stock which she has seen at 100 declines to 80 or 50 or the benchmark index which was at say 12,000 and now is at 10,000 or lower; this experience basically instills fear into her mind and a desire to avoid the pain lets the birth of question or decision that she should not invest at present or what could be the right time to buy so that the prices does not fall and only goes up from her investment level.
So, what does "All time is good to buy stocks." mean. It means what it says and its true. It, in fact implies 'consideration' and not actual purchase.
See, there are two things. One is individual stock and other is the benchmark itself. Remember, the investment is always done on the basis of fundamental analysis i.e. the valuation of individual stock or stocks.
So, the point is it is possible that some stock is available at cheap valuation while benchmark index is continuously rising up and up and has become pricey on many parameters such as historic PE, market cap to GDP etc.
So, one thing is clear that there are thousands of stocks listed on a stock exchange and you need to do individual company analysis to determine whether that stock should be bought or not irrespective of the benchmark index. Likewise, it is possible that in a bear market many stocks could still be overvalued.
So, this was the valuation angel explaining need to arrive at investment decision based on fundamental analysis of individual shares to find out its right attractive valuation.
Now about calling bottom and top in the market i.e. market timing. There is a proverb among the learned in the market, "Only a liar or fool have found top or bottom in stock markets.", meaning thereby, it is impossible to call top or bottom in benchmark index or any individual stocks. Historically it has not been possible neither does it look like it could happen in future.
That said, the investor should remove the argument from her mind about 'Investing when market will form bottom as it will come down more', or "Investing after the market corrects as it has been rising continuously and a correction is possible because of which prices will decline and stocks will be available cheaper".

History of stock market re-bounds after crisis:
The stock market has witnessed huge ups and downs over its existence across centuries. It has witnessed recessions, depressions, wars, commercial and technological disruptions, economic, political and social revolutions. It has also witnessed pandemic situations in past. And it has reacted by going up or down. But is has never shut down forever. It has stood tall after every crisis has passed. They have fell and badly; but risen again only to achieve new highs in terms of benchmark indices; and so will it happen after everything is settled of Coronavirus.

Every crisis ends:
The great depression of 1929 lasted for only 3 yrs, and mind it was 'the great depression' having no consumers and producers or technology of present day or central banks and governments which have power to affect economy with superb precision with its fiscal and monetary policy. Also, there was no globalization neither institutions of global cooperation such as UN, WTO, World Bank, EU, SAARC, ASEAN etc.
Forget that; the 2008 global financial crisis led recession lasted hardly  for one year.
In a nutshell, the stock markets bear phase does not last too long and they rise as sharply as they fall. Again, to avoid loss of capital, you need individual stock investment strategy and active portfolio investing process. Following benchmark index of the world up and down and smiling and crying and getting confused and then all happy or sad is not a sign of smart investor.
The present Coronavirus crisis will also end soon and things will be normal before you know. Fortunately India has not been affected terribly compared to the rest of the world. We have so far registered less than 300 cases with less than 10 deaths due to COVID-19 infection.
So, at present, this whole crisis is more of panic situation in India than an actual one, which it could become if the government does not come in action and take measures which is rightly has done.
So, those out there who want to invest need not wait for the crisis to end and then start investing. Because when the SALE is over, you will be left out again with new higher prices. When everything will get back to normal there will be stampede to buy stocks and you will be staring at same old high levels again. Remember the old adage - The opportunity of a lifetime has to be seized in the lifetime of that opportunity.
The mortality rate is 5% which is not alarming. China, which was the epicenter of this crisis has reported zero new cases in last 3 days which is astonishingly relieving. At many places, successful drug trials and certain combination of medicines have cured positive Coronavirus patients.

The India specific case:
For any stock market to run, the listed companies need to be in business and make profits. For the companies to be in business and make profits, they need an economy which has demand and supply of goods and services in abundance.
India has this enviable advantage of domestic producers and domestic consumers, which can practically guarantees the well functioning of the economic engine.

In conclusion:
Every crisis eventually ends.
The world will go on.
We are in capitalist and free market economy where stock market is an important pillar.
Capitalism is here to stay.
Stock markets eventually only goes up. But not all stock will.
Investment is done on the basis of fundamental analysis and individual stock valuations.
Trading is done based on technical analysis and math.

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