Aarav wasn’t in the best mood. Noticing this, his friend Manav enquired, “What’s bothering you Aarav? You appear to be worried about something.”
“Yes, Manav,” he admitted. “I was just getting the hang of share trading and intraday trading, and things were going quite well for me. Now, however, with the COVID-19 crisis, my investments and trades aren’t performing as well. I’m worried I’ll lose my capital, and I’m not sure how to proceed.”
“That’s quite understandable,” Manav empathised. “But there’s good news. You need not worry about your trades. You just need to know what the best way forward is.”
“Well, that’s some sane advice. But how do I know what to do? It’s not as if this kind of situation has ever occured before, has it?” Aarav wondered aloud.
“It’s interesting that you should mention this,” Manav chimed in. “This has happened before, with epidemics like SARS and the Bird Flu. I’ve been reading up on how the markets reacted to those incidents, and there’s a lot we can learn from these previous outbreaks.”
Aarav was intrigued. “Oh. That sounds interesting. Do tell me more.”
Manav began by explaining how share trading and the markets were affected when SARS affected the world. “During the SARS outbreak back in 2002 and 2003, the BSE SENSEX witnessed a fall of around 10.07%.”
“That’s bad,” said Aarav, frowning with worry.
“There’s good news, though,” Manav assured him. “In the next one year, the index bounced back up by around 77.68%. Then again, the BSE SENSEX fell by around 12.23% during the Bird Flu, which spread during January to August 2004. It also fell by 13.39% when the Zika Virus caused an epidemic, between November 2015 and February 2016. But, just like before, the index rose up sharply in the next one year, by 47.42% after the Bird Flu and by 13.36% after the Zika Virus episode.”
“That’s heartening to hear. However, hasn’t it been worse this time around, with the COVID-19 outbreak?”
“I’ll have to agree with you here, Aarav. The Indian stock markets were forced to bear the brunt of the COVID-19 pandemic as the BSE SENSEX fell by around 27% in a span of around 2 months. The index went from 41,115 on January 27, 2020 to 29,815 on March 27, 2020. That’s a fall of around 11,300 points!”
“Yes, that’s what has me so worried. I’m afraid to engage in share trading or investing now, during this kind of financial climate. In fact, I’m apprehensive about intraday trading as well.” Aarav confessed.
“There’s good news here, Aarav. Don’t you worry,” Manav encouraged him. “There’s a lot we can learn by reading into these statistical figures. It teaches us several lessons and gives us a greater degree of clarity on how the markets react during and after a health epidemic. We can also learn a great deal about how to go about trading or investing during these times.”
“I’d love to know more about this, Manav. Do tell, what are some important lessons for a beginner like me?” Aarav enquired.
Lesson 1: Recovery is inevitable
“The first lesson we can learn is that recovery is inevitable,” Manav ventured.
“After carefully considering the statistics and the post-outbreak market reactions, one thing is certain. The recovery of the financial markets seems to be certain after every outbreak or health epidemic. Since the negative reaction of the markets is primarily fuelled by emotion rather than economics during the outbreak of a disease, the freefall tends to be short-lived. Patience becomes key here. In a situation where the markets are getting battered, holding your stock portfolio instead of selling them off would be a better idea, Aarav.”
“I’ll keep that in mind. It’s good to know that there’s hope,” said Aarav, with a hint of a smile.
Lesson 2: Invest in defensive stocks
“The second thing episodes like this teach us is that it’s a safe bet to invest in defensive stocks.”
“What’s that?” Aarav interrupted.
“The stocks that are relatively immune to economic fluctuations and the state of the stock market are known as defensive stocks. These stocks deliver consistent performance and stable returns irrespective of the performance of the market,” Manav elaborated.
“Could you give me some examples, Manav?”
“Sure. For instance, the stocks of companies that manufacture Fast-Moving Consumer Goods (FMCGs) are defensive stocks since the demand for their products remains constant throughout the year. Investing in such stocks can help tide you over the turbulent phase until the market recovers. You can engage in intraday trading of defensive stocks, or you could make delivery trades.”
“I’ll make a note of that,” Aarav acknowledged,
Lesson 3: Refrain from purchasing cyclical stocks
“The third and final lesson I’ve personally learned is that you should refrain from purchasing cyclical stocks during these times.” Manav said.
Aarav had another query. “What are cyclical stocks, Manav?”
“Stocks whose performance is directly linked to the state of the economy and the performance of the stock market are known as cyclical stocks. For instance, stocks of companies involved in transportation, travel, and hospitality are generally considered to be cyclical stocks. Past data from previous outbreaks of diseases show that these stocks suffered heavily during the epidemic. In addition to that, the time it took to recover was also significantly higher,” Manav informed him.
“I’ll steer clear of those then, for now, at least,” Aarav said. “Thanks Manav. You’ve really cleared up a path for me. I was beginning to get very worried.”
“No problem at all, Aarav. Feel free to drop in for a discussion any time you wish to.” Manav said graciously.