The COVID Opportunity

We live in perilous times, and perilous times these are. The markets are bleeding, the value of money has been depreciating. Heck, even gold, the safest of all assets has also been losing value with each passing day! Yes, these are dangerous times. But if you have some nerves of steel and are willing to go on a limb if required to, to come out of this pandemic as a miracle worker-financially, this post is for you!

They say what is life if you are not living dangerously! While there is a thin line between bravery and stupidity, I guess we can learn to distinguish between the same by following a few basic tenets of risk management.

“You can only make money when there is blood on the streets.”- John D. Rockefeller

The first of these tenets to pay attention to history. Over the last 100 years of trading in the US stock market, investors have been provided with only two opportunities to make a killing- the great depression and the great recession. For an Indian investor, the finance Gods gave us the great recession, but with a severe injury to everyone’s purse and economic welfare.

This present massacre of the capital markets under the aegis of COVID-19 presents an extraordinary situation that has arguably never happened in the past. In the past, all the stress and slowdown of the markets was a result of man’s activities- our elated take on good financial performance, our over-optimistic projections of the future growth potential, our ignorance of living by adequate risk measurements and our blatant appetite for debt. But COVID-19 is not from the realm of human creations- which is exactly what makes this situation rather unique.

Now while a lot of people have been affected by the virus, some have lost lives, I would argue that the pandemic is rather not as much of a killer when you compare it to the likes of ebola or black plague. And it is in this premise that I believe that large scale loss of human life is not in my projected horizon from COVID-19.

If we are to believe that quarantine, social-distancing and locking oneself up within the perimeter of one’s residence will help us break the cycle of disseminating COVID-19, we have a very good chance to return to a world that has been shocked gray from fear, while the underlying demand, capital, and labor is intact, that is a world worth the gold, but priced in nickel.

So how do we go about it? We first seek out how much money we would need for the next three months of survival- food, basic amenities and a contingency fund for medical supplies (I am assuming that you do have insurance). Cover yourself up for that position with cash. Do not engage in any cash spending which cuts down your liquidity, because when the times turn rough- which it surely will over the next one month, it will be the cash in hard that will save you rather than the stocks and bonds in the bank!

Once you have the cash sorted, move the excess to everything that will mint money for you when the COVID’s cycle is over. And to do that you need to know which industries are the ones that have a competitive advantage in a market when China has taken a bullet in the knee.

Truth is India, its major industries have strong dependence on China for a plethora of products- electronics, agrochemicals, machineries, etc. But there are industries that have been competing with China for quite some time but have been pretty muted in its fighting capability.

Case in point- the leather industry, the ceramics industry, logistics, plastic products, etc. Companies in these sectors will have a competitive advantage of chewing into China’s market share.

Then comes industries that cater to the Indian demand, but face stiff competition from Chinese imports. Case in point- building materials, machine tools, consumer durables, etc.

The only point to never be forgotten during analysis for opportunities is that while certain industries face competition from China, the full capacity of those industries might be insufficient to meet India’s demand- which will either result in companies becoming aggressive and piling debt to meet the demand or be a sideline viewer, seeing the opportunity flee. In either case, these companies should not command high valuation.

So, there you have it, the once in a lifetime opportunity to invest in a market where everything is so cheap that most investments will make a decent amount of return. Go out there, and seek value from the most efficient players in each market, and hoard a portfolio of all the blue-chip producers in the Indian market- it’s a sure shot win portfolio.

Happy investing!