In this edition, we have covered details related to SEBI’s initiatives to curb the POA misuse by brokers.

SEBI’s amendments to the Investment Adviser Regulations.

The finer points on the Viwaad se Vishwaas Scheme of the Union Budget

The perils of not looking at real inflation.

Market Commentary

It is all about floating above the water level!!

Sometimes there is no escape from getting drenched or wet. If one can keep the head above the water level, there is always a 100% chance that at some point in future, you will get out of water. That water level is the benchmark levels (Nifty, Nifty Mid-Cap, Dow Jones etc) and head level is your indexed portfolio level. As on 11th March, Nifty is up 5% on an annualised basis for the last 5 years, -5% for the year and -14% a year till the date of March 11. We know that on a 10-year basis, Equity delivers close to minimum 9-10% returns on a nominal basis. This implies a double-digit return from here for the next few years which may get a bit delayed but surely, destined.

As per a Bloomberg report, in the cases of previous coronavirus related diseases, the mortality rate has been much higher. The 2002-2003 epidemic of the severe acute respiratory syndrome, or SARS killed 9.5% of patients, and another known as MERS-CoV led to death in 34% of the 2,499 cases recorded since 2012. Therefore, fear should not be based on mortality rates. However, in the previous outbreaks, the viruses didn’t transmit from one person to another as fast and wide as this new one. Therefore, It is the spread which is indirectly creating panic. There also we need to consider the fact that the cases where patients have recovered is more than the new cases discovered.

Some of the encouraging factors are mentioned below:

1. Chinese President Xi Jinping visiting Wuhan, the original epicentre, on March 10 for the first time since the disease emerged indicates a high probability that the Chinese government has managed to control the disease spread in Wuhan.
2. The number of new cases has dropped dramatically in China.
3. Mortality Rate – The WHO has stopped publishing death rates after March 5th as they are still assessing the basis of classifying the rates and based on the last available estimate as of 5th March, the mortality rate in Wuhan was 5.8% and outside Wuhan 0.7%.
4. Most western countries are on the same virus spread trajectory. A graphic analysis by John Hopkins University shows that based on the current availability of data, the cumulative number of cases graph tends to peak between 15 to 20 days. The days referred here stand for the number of days since 100th case.
5. Singapore and Hong Kong have not seen a further increase in the number since 5 – 10 days after 100 cases were crossed.
6. As Indians, we are better equipped than most of the other nations in handling such outbreaks.

In an article written by Mr. Sandipan Deb (Former editor of Financial Times) in The Livemint, he mentions “In the US, 337,000 people died of the flu between 2010-11 and 2018-19—37,444 people per year. India saw 11,030 flu deaths from 2010 to 2019—1,103 a year, with more than four times the population of the US.”

Further, he adds, “We have grown up surrounded by so much filth and pollution that our natural resilience is much stronger than people in the developed world. The 2003 SARS epidemic

spread to 29 countries across the world, killing nearly a thousand people, but the only three people in India detected with it recovered quickly. MERS didn’t even reach India, even though India-West Asia people traffic is very high. All the 327 Indians evacuated from Wuhan when the MR there was at its peak, were free of any infection.”

Markets Behaviour

Markets have seen low trading volumes and low delivery of shares which means most of the positions are getting squared off. This means markets will see an immediate rebound as and when the sentiment changes.

For example, when Nifty was down 538 points on March 9th, the post-close trading data on the 5 biggest falling large caps and 4 midcaps indicate very low fundamental shift and possibilities of a fast rebound when sentiment changes.

Low deliverable % indicates more squaring off on intraday positions, which in the case of falling share prices means shorts getting cancelled by day end. A % below 50 is considered as a weak signal on the selling side.

The country largest affected with the virus is China where after the initial spread was controlled, the markets have not behaved like how the other markets are behaving and are in fact, slightly positive. India is likely to see panic reaction; however, we will see normalcy come back once the initial high spread period is over which based on other countries data is roughly 15-20 days after the first 100 cases are discovered. India will become a relative outperformer and attract more funds because of its possible effective control on the limited spread of the virus and also due to the likely improvement in the perspective of being a safer option for setting up manufacturing operations vis-a-vis China.

Our View

1. While we believe that the coronavirus may first spread to newer areas depending directly to the level of public interactions and then, due to its lower mortality rate will eventually lose its fear factor. While in the short term, the impact of the new cases and related deaths will far outweigh the eventual dropdown in fresh cases and fewer deaths/higher recoveries, there will remain maximum pain. A 20-day period after the first 100 cases is the current safe estimate after which the growth in new cases control and eventually come down.
2. Markets were overvalued and that is a reason why we were running STP’s so far. STP’ duration needs to be reduced which means the per month investment instalments will increase
3. Interest rates likely to remain low for an extended period of time thus ensuring liquidity support.
4. We agree when markets are down due to fear and overvaluation, the equity portfolio corrects, however, the overall portfolio should continue to fall lesser than the market. This is possible if Asset Allocation which gives the power and flexibility to switch assets depending on the attractiveness of one relative to the other.

Our Advice

1. Equity STP’s reduced to 6 months if the current STP’s are more than 6 months in duration.
2. In case of certain debt funds which have taken a hit, it is prudent to book the losses and move the funds to Equity which will rise more after correction, and the gains will become long term in a year’s time itself. This is recommended for portfolio’s where the current debt allocation is higher. In any case, the segregated funds will continue to be in the portfolio even if the parent fund is exited.
3. Lastly, have emergency cash resource as well and if possible, shift corpus from maturing FD’s and Closed-ended funds to the current portfolio instead of letting them roll over the FD and also suggest a new closed-ended fund.
4. Maintaining a portfolio of open-ended funds on the basis of asset allocation is the best way to create a well liquidated and flexible-to-operate portfolio.

The writer is the CIO of Mitraz Financial and can be contacted through micontact@mitraz.financial