Just as the Global and Indian economy were finding their feet and people started to move out cautiously, we now have a whole new scare related to the Coronavirus pandemic. Governments are imposing restrictions again and everyone is worried.
Viruses mutate all the time, which is why people catch ‘the flu’ every year despite the fact that recovering from a particular strain builds antibodies (which is true for Coronavirus too). Every time the virus is transmitted to a new host, it has the possibility of mutating. With a raging pandemic and millions of people being infected around the Globe, the opportunity to mutate has been so many more this time.
Most virus mutuations are insignificant and do not alter the transmitting ability. However, once in a while the mutation is significant enough to change all that. This happened with the Delta variant and is expected to happen with the Omicron variant. What matters now is the response to the virus. For markets, these ups and downs and the uncertainty is nothing new. Multiple positive and negative factors keep taking the markets up and down in waves, similar to the waves we are seeing of the pandemic. This kind of risk is more accounted for in the stock markets than in real life. Investors in the markets have learnt to deal with it. We now have to learn to live with it.
I remember 20 years back, post the IT bust in Y2K (year 2000), the BSE Sensex was trading at about 3,000 and falling rapidly every day, about 100 points. A colleague at work commented saying if the markets keep falling like this, they will be at Zero in one month’s time. Fortunately, that did not happen and the markets are 20x in 20 years from there.
However, the point is we tend to think in straight lines while extrapolating while markets (and life) move in cycles. When things are going bad we start fearing the worst and when all is hunky dory, we start painting blue sky estimates. Markets reflect the same fear and euphoria at various points in time and therefore get overvalued in bull runs and undervalued during bear times. However, there are limits to this and these are set by the fact that valuations like the Price to Earnings multiple (P/E) cannot go to infinity and can neither fall to zero.
As Benjamin Graham once said ‘In the short run the markets are a voting machine but in the long run they are a weighing machine’. Thus, if you wait long enough the valuation of a good company will bounce back after a fall.
Eventually, these ups and downs will even out and hopefully the pandemic will become endemic. In the interim, keep a keen eye on the fundamentals and if you do find good companies trading cheap due to a gloomy overall outlook, take a longer term view and seriously consider investing during such challenging times.
(Pankaj Chopra is the founder of Five Rivers Portfolio Managers)