the silver lining - idfc first bank · 2021. 1. 13. · • the silver lining • the covid - 19...
TRANSCRIPT
FIRST ealthMAY 2020
www.idfcfirstbank.com
• The Silver Lining
• The Covid - 19 setback
• Equity Market - Patience To Hold
• Debt Market - Covid Maze.. Market in Haze...
Unlock yourFinancial Wellness.
The Coronavirus pandemic has triggered a crash in
stock markets worldwide. In India, it threatens to be the
third 50% fall since the turn of the millennium.
In this article, I suggest that the way to handle such
stock market crashes are through the vision to see, the
courage to buy, and the patience to hold.
How to handle stock market crashes
"Unless you can watch your stock holding decline by
50% without becoming panic-stricken, you should not
be in the stock market." - Warren Buffett
Warren Buffett’s above words have proved relevant at
the market level at least twice so far this millennium.
And we may well be in the midst of the third.
The first time was the dotcom bust followed by 9/11 –
from 1,700 levels in Feb-2000, the Nifty crashed 51% to
850 levels around Oct-2001. The second time was the
2008-09 global financial crisis – from nearly 6,300 in
early 2008, the Nifty crashed 59% to 2,600 levels by
Mar-2009. We may well be in the middle of a third such
decadal cleansing of the market – from a high of 12,300
in Jan-2020, Nifty collapsed 38% to 7,600 levels in just
over two months, before recovering somewhat.
The key question – how should investors handle such
stock market crashes?
This question can be addressed from the perspective of
two kinds of investors –
1. Existing investors i.e. those already invested; and
2. Prospective investors i.e. those wanting to invest
Existing investors may well be advised to heed
Buffett’s words and stay invested through the market
cycles. The only pre-condition – they need to stay
invested in “wonderful” companies. As Buffett has also
said, “Time is the friend of the wonderful company, the
enemy of the mediocre.” During market crashes,
wonderful companies will at best suffer ‘quotational
loss’ i.e. temporary loss in stock price, followed by a
recovery. In contrast, mediocre companies will suffer
“permanent capital loss” i.e. loss not only in stock price
but in business value itself.
What constitutes a “wonderful” company will differ from
investor to investor. I evaluate companies using the
QGLP framework – Q for Quality of business and
Quality of management, G for Growth in earnings, and
L for Longevity of both, quality and growth. Finally, a
‘wonderful’ company, should also be a wonderful stock
i.e. all of QGL should be available at a reasonable
price, the P of QGLP.
For prospective investors, all such market crashes are
godsend opportunities for supernormal returns. They
get a chance to ride the “bottom-to-top cycle”. Thus,
from the Nifty top of 1,700 in Feb-2000, the next top was
6,300 in early 2008 i.e. 8-year return CAGR of 18%.
However, for investors who invested in the Oct-2001
Nifty bottom of 850, the 6.5-year return CAGR works out
to a massive 36%!
Likewise, from the 6,300 top in early 2008, the next top
was about 12,300 in early 2020. The top-to-top return
CAGR works out to just 6%. However, from the early
2009 bottom of about 2,600, the bottom-to-top return
works out to a decent 14%.
Going forward, say, the Nifty touches 25,000 in the next
8 years. From the Jan-2020 top of 12,300, the return
CAGR works out to 9%. However, from the bottom of
7,600, the return CAGR works out to a robust 16%.
Back to basics
Stock market crashes are best handled by getting back
to the basics of long-term investing. In his classic book,
100 to 1 in the Stock Market, Thomas Phelps has said,
“To make money in stocks, you must have a vision to
see, courage to buy and patience to hold. Patience is
the rarest of the three.”
Vision to see
This is the first and most critical step in long-term
investing. Stock market crashes are marked by a high
level of noise about the present and the near-term
future. This is where a clear vision of the long-term
future proves handy. Such a vision to see comes from
the long-period India story, what I call the NTD (Next
Trillion Dollar) Opportunity.
It took India almost 60 years to clock its first
trillion-dollar of GDP in FY08. After that, given the power
of compounding, the second trillion-dollar of GDP came
in just 7 years. Every next trillion-dollar (NTD) of India’s
GDP is expected to come in successively shorter
periods. This linear growth in GDP spells exponential
opportunity for several businesses run by
management with integrity competence and a growth
mindset.
Courage to buy
Warren Buffett has famously said, “Be fearful when
others are greedy and greedy when others are fearful”.
The courage to buy when the whole world is fearfully
selling arises from the above vision to see itself.
Experience also suggests that following a sharp
correction, most sound companies bounce back with a
vengeance across sectors.
Patience to hold
As Thomas Phelps’s quote itself says, patience to hold
is the rarest of the three attributes. During market
crashes, it is very difficult to catch the bottom. Investors
may see a further fall in the stock prices after they have
bought, testing investors’ patience. Only those investors
will emerge successfully from market crashes who have
full conviction in their vision and high level of patience to
see it become a reality.
In conclusion
The Coronavirus pandemic has triggered a crash in
stock markets worldwide. In India, it threatens to be the
third 50% fall since the turn of the millennium. Each
time, the trigger is different, but the outcome is broadly
the same – the fall is sharp but short-lived, and post the
recovery, investors enjoy a great run of the
“bottom-to-next-top” cycle.
Expect the Corona-led lock-down to disrupt Q1 of
FY21 at most. However, post that, multi-year low
prices of crude should help lead the recovery in GDP
and corporate sector profits. The time is ripe to invest
in “wonderful” companies i.e. great businesses
(preferably consumer-facing) run by great
managements.
Investors who stay put through this crisis, and have
the gumption to take advantage through staggered
allocation over the next 3-4 months, stand to benefit.
The Coronavirus pandemic has triggered a crash in
stock markets worldwide. In India, it threatens to be the
third 50% fall since the turn of the millennium.
In this article, I suggest that the way to handle such
stock market crashes are through the vision to see, the
courage to buy, and the patience to hold.
How to handle stock market crashes
"Unless you can watch your stock holding decline by
50% without becoming panic-stricken, you should not
be in the stock market." - Warren Buffett
Warren Buffett’s above words have proved relevant at
the market level at least twice so far this millennium.
And we may well be in the midst of the third.
The first time was the dotcom bust followed by 9/11 –
from 1,700 levels in Feb-2000, the Nifty crashed 51% to
850 levels around Oct-2001. The second time was the
2008-09 global financial crisis – from nearly 6,300 in
early 2008, the Nifty crashed 59% to 2,600 levels by
Mar-2009. We may well be in the middle of a third such
decadal cleansing of the market – from a high of 12,300
in Jan-2020, Nifty collapsed 38% to 7,600 levels in just
over two months, before recovering somewhat.
The key question – how should investors handle such
stock market crashes?
This question can be addressed from the perspective of
two kinds of investors –
1. Existing investors i.e. those already invested; and
2. Prospective investors i.e. those wanting to invest
Existing investors may well be advised to heed
Buffett’s words and stay invested through the market
cycles. The only pre-condition – they need to stay
invested in “wonderful” companies. As Buffett has also
said, “Time is the friend of the wonderful company, the
enemy of the mediocre.” During market crashes,
wonderful companies will at best suffer ‘quotational
loss’ i.e. temporary loss in stock price, followed by a
recovery. In contrast, mediocre companies will suffer
“permanent capital loss” i.e. loss not only in stock price
but in business value itself.
What constitutes a “wonderful” company will differ from
investor to investor. I evaluate companies using the
QGLP framework – Q for Quality of business and
Quality of management, G for Growth in earnings, and
L for Longevity of both, quality and growth. Finally, a
‘wonderful’ company, should also be a wonderful stock
i.e. all of QGL should be available at a reasonable
price, the P of QGLP.
For prospective investors, all such market crashes are
godsend opportunities for supernormal returns. They
get a chance to ride the “bottom-to-top cycle”. Thus,
from the Nifty top of 1,700 in Feb-2000, the next top was
6,300 in early 2008 i.e. 8-year return CAGR of 18%.
However, for investors who invested in the Oct-2001
Nifty bottom of 850, the 6.5-year return CAGR works out
to a massive 36%!
Likewise, from the 6,300 top in early 2008, the next top
was about 12,300 in early 2020. The top-to-top return
CAGR works out to just 6%. However, from the early
2009 bottom of about 2,600, the bottom-to-top return
works out to a decent 14%.
Going forward, say, the Nifty touches 25,000 in the next
8 years. From the Jan-2020 top of 12,300, the return
CAGR works out to 9%. However, from the bottom of
7,600, the return CAGR works out to a robust 16%.
Back to basics
Stock market crashes are best handled by getting back
to the basics of long-term investing. In his classic book,
100 to 1 in the Stock Market, Thomas Phelps has said,
“To make money in stocks, you must have a vision to
see, courage to buy and patience to hold. Patience is
the rarest of the three.”
Vision to see
This is the first and most critical step in long-term
investing. Stock market crashes are marked by a high
level of noise about the present and the near-term
future. This is where a clear vision of the long-term
future proves handy. Such a vision to see comes from
the long-period India story, what I call the NTD (Next
Trillion Dollar) Opportunity.
It took India almost 60 years to clock its first
trillion-dollar of GDP in FY08. After that, given the power
of compounding, the second trillion-dollar of GDP came
in just 7 years. Every next trillion-dollar (NTD) of India’s
GDP is expected to come in successively shorter
periods. This linear growth in GDP spells exponential
opportunity for several businesses run by
management with integrity competence and a growth
mindset.
Courage to buy
Warren Buffett has famously said, “Be fearful when
others are greedy and greedy when others are fearful”.
The courage to buy when the whole world is fearfully
selling arises from the above vision to see itself.
Experience also suggests that following a sharp
correction, most sound companies bounce back with a
vengeance across sectors.
Patience to hold
As Thomas Phelps’s quote itself says, patience to hold
is the rarest of the three attributes. During market
crashes, it is very difficult to catch the bottom. Investors
may see a further fall in the stock prices after they have
bought, testing investors’ patience. Only those investors
will emerge successfully from market crashes who have
full conviction in their vision and high level of patience to
see it become a reality.
In conclusion
The Coronavirus pandemic has triggered a crash in
stock markets worldwide. In India, it threatens to be the
third 50% fall since the turn of the millennium. Each
time, the trigger is different, but the outcome is broadly
the same – the fall is sharp but short-lived, and post the
recovery, investors enjoy a great run of the
“bottom-to-next-top” cycle.
Expect the Corona-led lock-down to disrupt Q1 of
FY21 at most. However, post that, multi-year low
prices of crude should help lead the recovery in GDP
and corporate sector profits. The time is ripe to invest
in “wonderful” companies i.e. great businesses
(preferably consumer-facing) run by great
managements.
Investors who stay put through this crisis, and have
the gumption to take advantage through staggered
allocation over the next 3-4 months, stand to benefit.
Dear Sir /Madam,
Hope you and your family are safe and healthy.
This edition of FIRSTWealth reaches you when the
world is amidst one of the biggest pandemics
encountered in recent history, with unprecedented
ferocity and uncertainty around its impact. India too
is grappling with the health scare and the subsequent
economic slowdown while earnestly making efforts
to control Covid - 19.
The silver lining-
Medical fraternity is putting all its might to formulate
vaccination to contain Covid - 19 spread, and we are
hopeful that the virus will soon be an event of the
past. Policymakers have taken three-fold approach
to mitigate its impact 1) Lockdown to control the
spread of the disease, 2) Fiscal support to stressed
households and businesses and 3) Monetary policy
actions to ensure smooth market functioning.
Simultaneously, we have some encouraging news to
share from our Bank. A brief snapshot of our FY20
performance:
• The strong growth of CASA of ` 4,631 Cr during
the quarter ending on 31st March 2020 resulted in
significant improvement of CASA Ratio of the Bank.
The Silver LiningAmit Kumar - Head of Retail Liabilities, IDFC FIRST Bank
CASA ratio reached 32.03% as on 31st March 2020 as compared to 24.06% as on 31st
December 2019, an improvement of 8% Q-o-Q.
• The CASA ratio of the Bank registered a strong Y-o-Y improvement to reach 32.03% as on 31st
March 2020 as compared to 11.40% as on 31st
March 2019, an improvement of 21% Y-o-Y.
• Retail Assets grew to ` 54,027 Cr as on 31st
March 2020 from ` 40,812 Cr as on 31st March
2019, a Y-o-Y growth of 32.4%.
• Wholesale Funded Assets (including stressed
equity and security receipts) reduced to ` 40,415
Cr as on 31st March 2020 from ` 56,665 Cr on
31st March 2019, a Y-o-Y reduction of 29%
• Liquidity Coverage Ratio (LCR) of the Bank at 31st March 2020 was strong at 140% as
against 114% on 31st December 2019.
• The Bank continues to remain well-capitalized with Common Equity ratio (CET1) estimated to be around 13% on 31st March 2020.
I am pleased to share another key development
where our Fixed Deposit Program of ` 50,000
Crores has been rated ‘FAAA/Stable' rating by
CRISIL. We thank you for all your trust and
2
continued support. It encourages us to strive
harder to live up to your expectations.
Also, encapsulating a few key highlights of our last
investment strategy note for our wealth
management clients:
The current crude oil crisis and post-pandemic
change in global economic dynamics do indicate
a few positive takeaways for India that we believe
should be leveraged upon:
• Lower oil import bill due to lower crude oil prices
would give the much required cushion to the
government on fiscal interventions
• Manufacturing shift to India could be a reality in
the wake of talks around China plus one
manufacturing strategy picking up momentum
• A possible increase in India’s weightage on the
MSCI Emerging Market index as reported can
attract significant FPI inflows as the market
regains stability
From the equity perspective, valuations appear
reasonable across the market cap spectrum due
to Covid - 19 fear led sell-off. Earnings downgrade
is expected in high impact sectors such as
aviation, hotels, restaurants, jewelry, retail,
shipping & ports.
On the fixed-income side, markets have remained
volatile and corporate bond spreads have
widened significantly due to redemption pressure.
Thus, on the fixed income allocation strategy we
maintain that elevated Corporate Bond spreads
(AAA) offer significant opportunity over G-sec and
repo rate in the lower end of the yield curve.
However, considering the risks arising from the
impact of Covid - 19 lockdown, we remain averse
to aggressive credit risk strategies.
I would like to conclude my note by reiterating that
asset allocation based long-term investing never
goes out of fashion and is a strategy for all
seasons. And that is exactly what has given our
client portfolios the robust foundation required to
sustain an event like this and its aftermath.
Stay healthy, stay safe.
The Coronavirus pandemic has triggered a crash in
stock markets worldwide. In India, it threatens to be the
third 50% fall since the turn of the millennium.
In this article, I suggest that the way to handle such
stock market crashes are through the vision to see, the
courage to buy, and the patience to hold.
How to handle stock market crashes
"Unless you can watch your stock holding decline by
50% without becoming panic-stricken, you should not
be in the stock market." - Warren Buffett
Warren Buffett’s above words have proved relevant at
the market level at least twice so far this millennium.
And we may well be in the midst of the third.
The first time was the dotcom bust followed by 9/11 –
from 1,700 levels in Feb-2000, the Nifty crashed 51% to
850 levels around Oct-2001. The second time was the
2008-09 global financial crisis – from nearly 6,300 in
early 2008, the Nifty crashed 59% to 2,600 levels by
Mar-2009. We may well be in the middle of a third such
decadal cleansing of the market – from a high of 12,300
in Jan-2020, Nifty collapsed 38% to 7,600 levels in just
over two months, before recovering somewhat.
The key question – how should investors handle such
stock market crashes?
This question can be addressed from the perspective of
two kinds of investors –
1. Existing investors i.e. those already invested; and
2. Prospective investors i.e. those wanting to invest
Existing investors may well be advised to heed
Buffett’s words and stay invested through the market
cycles. The only pre-condition – they need to stay
invested in “wonderful” companies. As Buffett has also
said, “Time is the friend of the wonderful company, the
enemy of the mediocre.” During market crashes,
wonderful companies will at best suffer ‘quotational
loss’ i.e. temporary loss in stock price, followed by a
recovery. In contrast, mediocre companies will suffer
“permanent capital loss” i.e. loss not only in stock price
but in business value itself.
What constitutes a “wonderful” company will differ from
investor to investor. I evaluate companies using the
QGLP framework – Q for Quality of business and
Quality of management, G for Growth in earnings, and
L for Longevity of both, quality and growth. Finally, a
‘wonderful’ company, should also be a wonderful stock
i.e. all of QGL should be available at a reasonable
price, the P of QGLP.
For prospective investors, all such market crashes are
godsend opportunities for supernormal returns. They
get a chance to ride the “bottom-to-top cycle”. Thus,
from the Nifty top of 1,700 in Feb-2000, the next top was
6,300 in early 2008 i.e. 8-year return CAGR of 18%.
However, for investors who invested in the Oct-2001
Nifty bottom of 850, the 6.5-year return CAGR works out
to a massive 36%!
Likewise, from the 6,300 top in early 2008, the next top
was about 12,300 in early 2020. The top-to-top return
CAGR works out to just 6%. However, from the early
2009 bottom of about 2,600, the bottom-to-top return
works out to a decent 14%.
Going forward, say, the Nifty touches 25,000 in the next
8 years. From the Jan-2020 top of 12,300, the return
CAGR works out to 9%. However, from the bottom of
7,600, the return CAGR works out to a robust 16%.
Back to basics
Stock market crashes are best handled by getting back
to the basics of long-term investing. In his classic book,
100 to 1 in the Stock Market, Thomas Phelps has said,
“To make money in stocks, you must have a vision to
see, courage to buy and patience to hold. Patience is
the rarest of the three.”
Vision to see
This is the first and most critical step in long-term
investing. Stock market crashes are marked by a high
level of noise about the present and the near-term
future. This is where a clear vision of the long-term
future proves handy. Such a vision to see comes from
the long-period India story, what I call the NTD (Next
Trillion Dollar) Opportunity.
It took India almost 60 years to clock its first
trillion-dollar of GDP in FY08. After that, given the power
of compounding, the second trillion-dollar of GDP came
in just 7 years. Every next trillion-dollar (NTD) of India’s
GDP is expected to come in successively shorter
periods. This linear growth in GDP spells exponential
opportunity for several businesses run by
management with integrity competence and a growth
mindset.
Courage to buy
Warren Buffett has famously said, “Be fearful when
others are greedy and greedy when others are fearful”.
The courage to buy when the whole world is fearfully
selling arises from the above vision to see itself.
Experience also suggests that following a sharp
correction, most sound companies bounce back with a
vengeance across sectors.
Patience to hold
As Thomas Phelps’s quote itself says, patience to hold
is the rarest of the three attributes. During market
crashes, it is very difficult to catch the bottom. Investors
may see a further fall in the stock prices after they have
bought, testing investors’ patience. Only those investors
will emerge successfully from market crashes who have
full conviction in their vision and high level of patience to
see it become a reality.
In conclusion
The Coronavirus pandemic has triggered a crash in
stock markets worldwide. In India, it threatens to be the
third 50% fall since the turn of the millennium. Each
time, the trigger is different, but the outcome is broadly
the same – the fall is sharp but short-lived, and post the
recovery, investors enjoy a great run of the
“bottom-to-next-top” cycle.
Expect the Corona-led lock-down to disrupt Q1 of
FY21 at most. However, post that, multi-year low
prices of crude should help lead the recovery in GDP
and corporate sector profits. The time is ripe to invest
in “wonderful” companies i.e. great businesses
(preferably consumer-facing) run by great
managements.
Investors who stay put through this crisis, and have
the gumption to take advantage through staggered
allocation over the next 3-4 months, stand to benefit.
Dear Sir /Madam,
Hope you and your family are safe and healthy.
This edition of FIRSTWealth reaches you when the
world is amidst one of the biggest pandemics
encountered in recent history, with unprecedented
ferocity and uncertainty around its impact. India too
is grappling with the health scare and the subsequent
economic slowdown while earnestly making efforts
to control Covid - 19.
The silver lining-
Medical fraternity is putting all its might to formulate
vaccination to contain Covid - 19 spread, and we are
hopeful that the virus will soon be an event of the
past. Policymakers have taken three-fold approach
to mitigate its impact 1) Lockdown to control the
spread of the disease, 2) Fiscal support to stressed
households and businesses and 3) Monetary policy
actions to ensure smooth market functioning.
Simultaneously, we have some encouraging news to
share from our Bank. A brief snapshot of our FY20
performance:
• The strong growth of CASA of ` 4,631 Cr during
the quarter ending on 31st March 2020 resulted in
significant improvement of CASA Ratio of the Bank.
CASA ratio reached 32.03% as on 31st March 2020 as compared to 24.06% as on 31st
December 2019, an improvement of 8% Q-o-Q.
• The CASA ratio of the Bank registered a strong Y-o-Y improvement to reach 32.03% as on 31st
March 2020 as compared to 11.40% as on 31st
March 2019, an improvement of 21% Y-o-Y.
• Retail Assets grew to ` 54,027 Cr as on 31st
March 2020 from ` 40,812 Cr as on 31st March
2019, a Y-o-Y growth of 32.4%.
• Wholesale Funded Assets (including stressed
equity and security receipts) reduced to ` 40,415
Cr as on 31st March 2020 from ` 56,665 Cr on
31st March 2019, a Y-o-Y reduction of 29%
• Liquidity Coverage Ratio (LCR) of the Bank at 31st March 2020 was strong at 140% as
against 114% on 31st December 2019.
• The Bank continues to remain well-capitalized with Common Equity ratio (CET1) estimated to be around 13% on 31st March 2020.
I am pleased to share another key development
where our Fixed Deposit Program of ` 50,000
Crores has been rated ‘FAAA/Stable' rating by
CRISIL. We thank you for all your trust and
3
continued support. It encourages us to strive
harder to live up to your expectations.
Also, encapsulating a few key highlights of our last
investment strategy note for our wealth
management clients:
The current crude oil crisis and post-pandemic
change in global economic dynamics do indicate
a few positive takeaways for India that we believe
should be leveraged upon:
• Lower oil import bill due to lower crude oil prices
would give the much required cushion to the
government on fiscal interventions
• Manufacturing shift to India could be a reality in
the wake of talks around China plus one
manufacturing strategy picking up momentum
• A possible increase in India’s weightage on the
MSCI Emerging Market index as reported can
attract significant FPI inflows as the market
regains stability
From the equity perspective, valuations appear
reasonable across the market cap spectrum due
to Covid - 19 fear led sell-off. Earnings downgrade
is expected in high impact sectors such as
aviation, hotels, restaurants, jewelry, retail,
shipping & ports.
On the fixed-income side, markets have remained
volatile and corporate bond spreads have
widened significantly due to redemption pressure.
Thus, on the fixed income allocation strategy we
maintain that elevated Corporate Bond spreads
(AAA) offer significant opportunity over G-sec and
repo rate in the lower end of the yield curve.
However, considering the risks arising from the
impact of Covid - 19 lockdown, we remain averse
to aggressive credit risk strategies.
I would like to conclude my note by reiterating that
asset allocation based long-term investing never
goes out of fashion and is a strategy for all
seasons. And that is exactly what has given our
client portfolios the robust foundation required to
sustain an event like this and its aftermath.
Stay healthy, stay safe.
Life has changed dramatically the world over since
the emergence of the first case of Covid - 19 in
Wuhan, China in December 2019. As we write, the
virus has infected more than 30L people worldwide
with 2L people succumbing to the disease. Given the
infectious nature of the disease, and to prevent rising
human costs worldwide, most nations have imposed
a lockdown, necessary protection but one that is
severely impacting economic activity. While Wuhan
opened up after a 76 day lockdown, significant parts
of the world are expected to remain in varying
degrees of lockdown for an uncertain number of days
ahead.
IMF, in its “World Economic Outlook” published in
mid-April 2020 pointed out that the output loss
associated with this health emergency would
significantly surpass the losses seen during the
Great Financial Crisis a decade ago. Importantly,
given the very uncertain nature of this crisis and the
need for containment measures, stimulating
economic activity through traditional monetary and
fiscal tools would prove to be challenging.
Nevertheless, the policymakers across the globe
have unleashed significant doses of monetary and
fiscal policies, hoping that the deflationary trend does
not get deeply entrenched, and also creating
enablers for an upswing once the health emergency
ends. But, at this point, no one can say with certainty
The Covid - 19 setback Indranil Pan - Chief Economist at IDFC FIRST Bank
if these measures are enough or will fall short. The
IMF, for now, projects global growth to contract
sharply by -3% in 2020, Advanced Economies to
contract by -6.1%, and Emerging Markets and
Developing Economies to contract by -1%.
Unfortunately, for India, the timing of this crisis could
not have been worse, especially at a time when
analysts like myself were sieving through data to look
for signs of green shoots, and no doubt some of
these were visible. All that stands undone as
Lockdown 1.0 is estimated to have kept almost 63%
of economic activity suspended, while during
Lockdown 2.0 we estimate that 50% of activity
continues to remain in abeyance.
To talk of policy approach in India to counter this
shutdown – monetary policy has been aggressive
enough with a 75bps cut in the repo rate. The focus
has been on preventing tightness in the financial
markets and ensure adequate liquidity for all
economic agents. The RBI has opened up special
liquidity windows – earmarked for specific sectors –
the latest being a window of ` 500bn for the MF
segment. An attempt to push up credit has been
undertaken by widening the policy corridor to 90bps -
to dis-incentivise banks from parking their surplus
liquidity back with the RBI and instead focus on
creating credit.
4
The strategy from the government’s side has been to
focus first on containment and stabilisation and then
attempt at a stimulation. This has led to a fiscal
response that might appear as timid and restrictive –
amounting to only ` 1.7trn or 0.8% of GDP, focussed
on supporting the livelihood of the economically
weakest section of the population. Given the nature
of the problem and challenges that are likely to be
faced to restart the economy, these amounts will not
be enough even for the vulnerable segment – the
migrant labourers and the daily wagers. Right now
there is little point in stimulating the economy through
tax cuts (GST etc.) as all of us are sitting at home and
these amounts will remain unutilised. The stimulus
has to come only after shops again open up and the
population steps out of their homes. Apart from such
demand-side stimulus, the government will also need
to be mindful of supporting the SMEs and the
MSMEs and could provide credit guarantees to
ensure credit flows to these sectors in an
atmosphere of general risk aversion. Interest rate
subventions, with a sunset, a clause may also be
used as another tool.
No doubt the climb out of this condition will be
arduous and the government would need to ensure
that no productive capacity is lost and no business
winds down. Consumption could also be weak for
long as the general population can exhibit ‘aversion
behaviour’ and shun crowded places and not take
any discretionary travel etc. Consumers may exhibit
caution in spending as disposable incomes are hit,
wealth effect turns negative, and some could also
start building up savings buffers for such future
events. External demand will not provide any support
as global growth is expected to be negative. Thus,
rather than one big stimulus from the fiscal side, what
may work are smaller targeted doses that can be
recalibrated to suit the requirements of the evolving
situation.
A crisis period is one with lots of learnings for the
future and these opportunities should not be lost.
First, the government needs to take a real hard look
at the health infrastructure in the country and gear up
the same. Next, there needs to be a clear policy to
provide some protection to the migrant and casual
labourer to prevent disruptions in their livelihoods, as
has happened this time around. On a positive note,
the world and India will come out of this situation and
there are some indications that the rate of infection
world over has started to soften.
Stay home, stay safe!
The Coronavirus pandemic has triggered a crash in
stock markets worldwide. In India, it threatens to be the
third 50% fall since the turn of the millennium.
In this article, I suggest that the way to handle such
stock market crashes are through the vision to see, the
courage to buy, and the patience to hold.
How to handle stock market crashes
"Unless you can watch your stock holding decline by
50% without becoming panic-stricken, you should not
be in the stock market." - Warren Buffett
Warren Buffett’s above words have proved relevant at
the market level at least twice so far this millennium.
And we may well be in the midst of the third.
The first time was the dotcom bust followed by 9/11 –
from 1,700 levels in Feb-2000, the Nifty crashed 51% to
850 levels around Oct-2001. The second time was the
2008-09 global financial crisis – from nearly 6,300 in
early 2008, the Nifty crashed 59% to 2,600 levels by
Mar-2009. We may well be in the middle of a third such
decadal cleansing of the market – from a high of 12,300
in Jan-2020, Nifty collapsed 38% to 7,600 levels in just
over two months, before recovering somewhat.
The key question – how should investors handle such
stock market crashes?
This question can be addressed from the perspective of
two kinds of investors –
1. Existing investors i.e. those already invested; and
2. Prospective investors i.e. those wanting to invest
Existing investors may well be advised to heed
Buffett’s words and stay invested through the market
cycles. The only pre-condition – they need to stay
invested in “wonderful” companies. As Buffett has also
said, “Time is the friend of the wonderful company, the
enemy of the mediocre.” During market crashes,
wonderful companies will at best suffer ‘quotational
loss’ i.e. temporary loss in stock price, followed by a
recovery. In contrast, mediocre companies will suffer
“permanent capital loss” i.e. loss not only in stock price
but in business value itself.
What constitutes a “wonderful” company will differ from
investor to investor. I evaluate companies using the
QGLP framework – Q for Quality of business and
Quality of management, G for Growth in earnings, and
L for Longevity of both, quality and growth. Finally, a
‘wonderful’ company, should also be a wonderful stock
i.e. all of QGL should be available at a reasonable
price, the P of QGLP.
For prospective investors, all such market crashes are
godsend opportunities for supernormal returns. They
get a chance to ride the “bottom-to-top cycle”. Thus,
from the Nifty top of 1,700 in Feb-2000, the next top was
6,300 in early 2008 i.e. 8-year return CAGR of 18%.
However, for investors who invested in the Oct-2001
Nifty bottom of 850, the 6.5-year return CAGR works out
to a massive 36%!
Likewise, from the 6,300 top in early 2008, the next top
was about 12,300 in early 2020. The top-to-top return
CAGR works out to just 6%. However, from the early
2009 bottom of about 2,600, the bottom-to-top return
works out to a decent 14%.
Going forward, say, the Nifty touches 25,000 in the next
8 years. From the Jan-2020 top of 12,300, the return
CAGR works out to 9%. However, from the bottom of
7,600, the return CAGR works out to a robust 16%.
Back to basics
Stock market crashes are best handled by getting back
to the basics of long-term investing. In his classic book,
100 to 1 in the Stock Market, Thomas Phelps has said,
“To make money in stocks, you must have a vision to
see, courage to buy and patience to hold. Patience is
the rarest of the three.”
Vision to see
This is the first and most critical step in long-term
investing. Stock market crashes are marked by a high
level of noise about the present and the near-term
future. This is where a clear vision of the long-term
future proves handy. Such a vision to see comes from
the long-period India story, what I call the NTD (Next
Trillion Dollar) Opportunity.
It took India almost 60 years to clock its first
trillion-dollar of GDP in FY08. After that, given the power
of compounding, the second trillion-dollar of GDP came
in just 7 years. Every next trillion-dollar (NTD) of India’s
GDP is expected to come in successively shorter
periods. This linear growth in GDP spells exponential
opportunity for several businesses run by
management with integrity competence and a growth
mindset.
Courage to buy
Warren Buffett has famously said, “Be fearful when
others are greedy and greedy when others are fearful”.
The courage to buy when the whole world is fearfully
selling arises from the above vision to see itself.
Experience also suggests that following a sharp
correction, most sound companies bounce back with a
vengeance across sectors.
Patience to hold
As Thomas Phelps’s quote itself says, patience to hold
is the rarest of the three attributes. During market
crashes, it is very difficult to catch the bottom. Investors
may see a further fall in the stock prices after they have
bought, testing investors’ patience. Only those investors
will emerge successfully from market crashes who have
full conviction in their vision and high level of patience to
see it become a reality.
In conclusion
The Coronavirus pandemic has triggered a crash in
stock markets worldwide. In India, it threatens to be the
third 50% fall since the turn of the millennium. Each
time, the trigger is different, but the outcome is broadly
the same – the fall is sharp but short-lived, and post the
recovery, investors enjoy a great run of the
“bottom-to-next-top” cycle.
Expect the Corona-led lock-down to disrupt Q1 of
FY21 at most. However, post that, multi-year low
prices of crude should help lead the recovery in GDP
and corporate sector profits. The time is ripe to invest
in “wonderful” companies i.e. great businesses
(preferably consumer-facing) run by great
managements.
Investors who stay put through this crisis, and have
the gumption to take advantage through staggered
allocation over the next 3-4 months, stand to benefit.
Life has changed dramatically the world over since
the emergence of the first case of Covid - 19 in
Wuhan, China in December 2019. As we write, the
virus has infected more than 30L people worldwide
with 2L people succumbing to the disease. Given the
infectious nature of the disease, and to prevent rising
human costs worldwide, most nations have imposed
a lockdown, necessary protection but one that is
severely impacting economic activity. While Wuhan
opened up after a 76 day lockdown, significant parts
of the world are expected to remain in varying
degrees of lockdown for an uncertain number of days
ahead.
IMF, in its “World Economic Outlook” published in
mid-April 2020 pointed out that the output loss
associated with this health emergency would
significantly surpass the losses seen during the
Great Financial Crisis a decade ago. Importantly,
given the very uncertain nature of this crisis and the
need for containment measures, stimulating
economic activity through traditional monetary and
fiscal tools would prove to be challenging.
Nevertheless, the policymakers across the globe
have unleashed significant doses of monetary and
fiscal policies, hoping that the deflationary trend does
not get deeply entrenched, and also creating
enablers for an upswing once the health emergency
ends. But, at this point, no one can say with certainty
if these measures are enough or will fall short. The
IMF, for now, projects global growth to contract
sharply by -3% in 2020, Advanced Economies to
contract by -6.1%, and Emerging Markets and
Developing Economies to contract by -1%.
Unfortunately, for India, the timing of this crisis could
not have been worse, especially at a time when
analysts like myself were sieving through data to look
for signs of green shoots, and no doubt some of
these were visible. All that stands undone as
Lockdown 1.0 is estimated to have kept almost 63%
of economic activity suspended, while during
Lockdown 2.0 we estimate that 50% of activity
continues to remain in abeyance.
To talk of policy approach in India to counter this
shutdown – monetary policy has been aggressive
enough with a 75bps cut in the repo rate. The focus
has been on preventing tightness in the financial
markets and ensure adequate liquidity for all
economic agents. The RBI has opened up special
liquidity windows – earmarked for specific sectors –
the latest being a window of ` 500bn for the MF
segment. An attempt to push up credit has been
undertaken by widening the policy corridor to 90bps -
to dis-incentivise banks from parking their surplus
liquidity back with the RBI and instead focus on
creating credit.
5
The strategy from the government’s side has been to
focus first on containment and stabilisation and then
attempt at a stimulation. This has led to a fiscal
response that might appear as timid and restrictive –
amounting to only ` 1.7trn or 0.8% of GDP, focussed
on supporting the livelihood of the economically
weakest section of the population. Given the nature
of the problem and challenges that are likely to be
faced to restart the economy, these amounts will not
be enough even for the vulnerable segment – the
migrant labourers and the daily wagers. Right now
there is little point in stimulating the economy through
tax cuts (GST etc.) as all of us are sitting at home and
these amounts will remain unutilised. The stimulus
has to come only after shops again open up and the
population steps out of their homes. Apart from such
demand-side stimulus, the government will also need
to be mindful of supporting the SMEs and the
MSMEs and could provide credit guarantees to
ensure credit flows to these sectors in an
atmosphere of general risk aversion. Interest rate
subventions, with a sunset, a clause may also be
used as another tool.
No doubt the climb out of this condition will be
arduous and the government would need to ensure
that no productive capacity is lost and no business
winds down. Consumption could also be weak for
long as the general population can exhibit ‘aversion
behaviour’ and shun crowded places and not take
any discretionary travel etc. Consumers may exhibit
caution in spending as disposable incomes are hit,
wealth effect turns negative, and some could also
start building up savings buffers for such future
events. External demand will not provide any support
as global growth is expected to be negative. Thus,
rather than one big stimulus from the fiscal side, what
may work are smaller targeted doses that can be
recalibrated to suit the requirements of the evolving
situation.
A crisis period is one with lots of learnings for the
future and these opportunities should not be lost.
First, the government needs to take a real hard look
at the health infrastructure in the country and gear up
the same. Next, there needs to be a clear policy to
provide some protection to the migrant and casual
labourer to prevent disruptions in their livelihoods, as
has happened this time around. On a positive note,
the world and India will come out of this situation and
there are some indications that the rate of infection
world over has started to soften.
Stay home, stay safe!
The Coronavirus pandemic has triggered a crash in
stock markets worldwide. In India, it threatens to be the
third 50% fall since the turn of the millennium.
In this article, I suggest that the way to handle such
stock market crashes are through the vision to see, the
courage to buy, and the patience to hold.
How to handle stock market crashes
"Unless you can watch your stock holding decline by
50% without becoming panic-stricken, you should not
be in the stock market." - Warren Buffett
Warren Buffett’s above words have proved relevant at
the market level at least twice so far this millennium.
And we may well be in the midst of the third.
The first time was the dotcom bust followed by 9/11 –
from 1,700 levels in Feb-2000, the Nifty crashed 51% to
850 levels around Oct-2001. The second time was the
2008-09 global financial crisis – from nearly 6,300 in
early 2008, the Nifty crashed 59% to 2,600 levels by
Mar-2009. We may well be in the middle of a third such
decadal cleansing of the market – from a high of 12,300
in Jan-2020, Nifty collapsed 38% to 7,600 levels in just
over two months, before recovering somewhat.
The key question – how should investors handle such
stock market crashes?
This question can be addressed from the perspective of
two kinds of investors –
1. Existing investors i.e. those already invested; and
2. Prospective investors i.e. those wanting to invest
Existing investors may well be advised to heed
Buffett’s words and stay invested through the market
cycles. The only pre-condition – they need to stay
invested in “wonderful” companies. As Buffett has also
said, “Time is the friend of the wonderful company, the
enemy of the mediocre.” During market crashes,
wonderful companies will at best suffer ‘quotational
loss’ i.e. temporary loss in stock price, followed by a
recovery. In contrast, mediocre companies will suffer
“permanent capital loss” i.e. loss not only in stock price
but in business value itself.
What constitutes a “wonderful” company will differ from
investor to investor. I evaluate companies using the
QGLP framework – Q for Quality of business and
Quality of management, G for Growth in earnings, and
L for Longevity of both, quality and growth. Finally, a
‘wonderful’ company, should also be a wonderful stock
i.e. all of QGL should be available at a reasonable
price, the P of QGLP.
For prospective investors, all such market crashes are
godsend opportunities for supernormal returns. They
get a chance to ride the “bottom-to-top cycle”. Thus,
from the Nifty top of 1,700 in Feb-2000, the next top was
6,300 in early 2008 i.e. 8-year return CAGR of 18%.
However, for investors who invested in the Oct-2001
Nifty bottom of 850, the 6.5-year return CAGR works out
to a massive 36%!
Likewise, from the 6,300 top in early 2008, the next top
was about 12,300 in early 2020. The top-to-top return
CAGR works out to just 6%. However, from the early
2009 bottom of about 2,600, the bottom-to-top return
works out to a decent 14%.
Going forward, say, the Nifty touches 25,000 in the next
8 years. From the Jan-2020 top of 12,300, the return
CAGR works out to 9%. However, from the bottom of
7,600, the return CAGR works out to a robust 16%.
Back to basics
Stock market crashes are best handled by getting back
to the basics of long-term investing. In his classic book,
100 to 1 in the Stock Market, Thomas Phelps has said,
“To make money in stocks, you must have a vision to
see, courage to buy and patience to hold. Patience is
the rarest of the three.”
Vision to see
This is the first and most critical step in long-term
investing. Stock market crashes are marked by a high
level of noise about the present and the near-term
future. This is where a clear vision of the long-term
future proves handy. Such a vision to see comes from
the long-period India story, what I call the NTD (Next
Trillion Dollar) Opportunity.
It took India almost 60 years to clock its first
trillion-dollar of GDP in FY08. After that, given the power
of compounding, the second trillion-dollar of GDP came
in just 7 years. Every next trillion-dollar (NTD) of India’s
GDP is expected to come in successively shorter
periods. This linear growth in GDP spells exponential
opportunity for several businesses run by
management with integrity competence and a growth
mindset.
Courage to buy
Warren Buffett has famously said, “Be fearful when
others are greedy and greedy when others are fearful”.
The courage to buy when the whole world is fearfully
selling arises from the above vision to see itself.
Experience also suggests that following a sharp
correction, most sound companies bounce back with a
vengeance across sectors.
Patience to hold
As Thomas Phelps’s quote itself says, patience to hold
is the rarest of the three attributes. During market
crashes, it is very difficult to catch the bottom. Investors
may see a further fall in the stock prices after they have
bought, testing investors’ patience. Only those investors
will emerge successfully from market crashes who have
full conviction in their vision and high level of patience to
see it become a reality.
In conclusion
The Coronavirus pandemic has triggered a crash in
stock markets worldwide. In India, it threatens to be the
third 50% fall since the turn of the millennium. Each
time, the trigger is different, but the outcome is broadly
the same – the fall is sharp but short-lived, and post the
recovery, investors enjoy a great run of the
“bottom-to-next-top” cycle.
Expect the Corona-led lock-down to disrupt Q1 of
FY21 at most. However, post that, multi-year low
prices of crude should help lead the recovery in GDP
and corporate sector profits. The time is ripe to invest
in “wonderful” companies i.e. great businesses
(preferably consumer-facing) run by great
managements.
Investors who stay put through this crisis, and have
the gumption to take advantage through staggered
allocation over the next 3-4 months, stand to benefit.
The millennium 50% crash #1 – post the dotcom bust and 9/11
The millennium 50% crash #2 – the global financial crisis of 2008
The millennium 50% crash #3 – the Coronavirus crisis of 2020
The Coronavirus pandemic has triggered a crash in
stock markets worldwide. In India, it threatens to be the
third 50% fall since the turn of the millennium.
In this article, I suggest that the way to handle such
stock market crashes are through the vision to see, the
courage to buy, and the patience to hold.
How to handle stock market crashes
"Unless you can watch your stock holding decline by
50% without becoming panic-stricken, you should not
be in the stock market." - Warren Buffett
Warren Buffett’s above words have proved relevant at
the market level at least twice so far this millennium.
And we may well be in the midst of the third.
The first time was the dotcom bust followed by 9/11 –
from 1,700 levels in Feb-2000, the Nifty crashed 51% to
850 levels around Oct-2001. The second time was the
2008-09 global financial crisis – from nearly 6,300 in
early 2008, the Nifty crashed 59% to 2,600 levels by
Mar-2009. We may well be in the middle of a third such
decadal cleansing of the market – from a high of 12,300
in Jan-2020, Nifty collapsed 38% to 7,600 levels in just
over two months, before recovering somewhat.
Equity Market - Patience To Hold Mr. Raamdeo Agrawal, Chairman, Motilal Oswal Financial Services
6
The key question – how should investors handle such
stock market crashes?
This question can be addressed from the perspective of
two kinds of investors –
1. Existing investors i.e. those already invested; and
2. Prospective investors i.e. those wanting to invest
Existing investors may well be advised to heed
Buffett’s words and stay invested through the market
cycles. The only pre-condition – they need to stay
invested in “wonderful” companies. As Buffett has also
said, “Time is the friend of the wonderful company, the
enemy of the mediocre.” During market crashes,
wonderful companies will at best suffer ‘quotational
loss’ i.e. temporary loss in stock price, followed by a
recovery. In contrast, mediocre companies will suffer
“permanent capital loss” i.e. loss not only in stock price
but in business value itself.
What constitutes a “wonderful” company will differ from
investor to investor. I evaluate companies using the
QGLP framework – Q for Quality of business and
Quality of management, G for Growth in earnings, and
L for Longevity of both, quality and growth. Finally, a
‘wonderful’ company, should also be a wonderful stock
i.e. all of QGL should be available at a reasonable
price, the P of QGLP.
For prospective investors, all such market crashes are
godsend opportunities for supernormal returns. They
get a chance to ride the “bottom-to-top cycle”. Thus,
from the Nifty top of 1,700 in Feb-2000, the next top was
6,300 in early 2008 i.e. 8-year return CAGR of 18%.
However, for investors who invested in the Oct-2001
Nifty bottom of 850, the 6.5-year return CAGR works out
to a massive 36%!
Likewise, from the 6,300 top in early 2008, the next top
was about 12,300 in early 2020. The top-to-top return
CAGR works out to just 6%. However, from the early
2009 bottom of about 2,600, the bottom-to-top return
works out to a decent 14%.
Going forward, say, the Nifty touches 25,000 in the next
8 years. From the Jan-2020 top of 12,300, the return
CAGR works out to 9%. However, from the bottom of
7,600, the return CAGR works out to a robust 16%.
Back to basics
Stock market crashes are best handled by getting back
to the basics of long-term investing. In his classic book,
100 to 1 in the Stock Market, Thomas Phelps has said,
“To make money in stocks, you must have a vision to
see, courage to buy and patience to hold. Patience is
the rarest of the three.”
Vision to see
This is the first and most critical step in long-term
investing. Stock market crashes are marked by a high
level of noise about the present and the near-term
future. This is where a clear vision of the long-term
future proves handy. Such a vision to see comes from
the long-period India story, what I call the NTD (Next
Trillion Dollar) Opportunity.
It took India almost 60 years to clock its first
trillion-dollar of GDP in FY08. After that, given the power
of compounding, the second trillion-dollar of GDP came
in just 7 years. Every next trillion-dollar (NTD) of India’s
GDP is expected to come in successively shorter
periods. This linear growth in GDP spells exponential
opportunity for several businesses run by
management with integrity competence and a growth
mindset.
Courage to buy
Warren Buffett has famously said, “Be fearful when
others are greedy and greedy when others are fearful”.
The courage to buy when the whole world is fearfully
selling arises from the above vision to see itself.
Experience also suggests that following a sharp
correction, most sound companies bounce back with a
vengeance across sectors.
Patience to hold
As Thomas Phelps’s quote itself says, patience to hold
is the rarest of the three attributes. During market
crashes, it is very difficult to catch the bottom. Investors
may see a further fall in the stock prices after they have
bought, testing investors’ patience. Only those investors
will emerge successfully from market crashes who have
full conviction in their vision and high level of patience to
see it become a reality.
In conclusion
The Coronavirus pandemic has triggered a crash in
stock markets worldwide. In India, it threatens to be the
third 50% fall since the turn of the millennium. Each
time, the trigger is different, but the outcome is broadly
the same – the fall is sharp but short-lived, and post the
recovery, investors enjoy a great run of the
“bottom-to-next-top” cycle.
Expect the Corona-led lock-down to disrupt Q1 of
FY21 at most. However, post that, multi-year low
prices of crude should help lead the recovery in GDP
and corporate sector profits. The time is ripe to invest
in “wonderful” companies i.e. great businesses
(preferably consumer-facing) run by great
managements.
Investors who stay put through this crisis, and have
the gumption to take advantage through staggered
allocation over the next 3-4 months, stand to benefit.
The Coronavirus pandemic has triggered a crash in
stock markets worldwide. In India, it threatens to be the
third 50% fall since the turn of the millennium.
In this article, I suggest that the way to handle such
stock market crashes are through the vision to see, the
courage to buy, and the patience to hold.
How to handle stock market crashes
"Unless you can watch your stock holding decline by
50% without becoming panic-stricken, you should not
be in the stock market." - Warren Buffett
Warren Buffett’s above words have proved relevant at
the market level at least twice so far this millennium.
And we may well be in the midst of the third.
The first time was the dotcom bust followed by 9/11 –
from 1,700 levels in Feb-2000, the Nifty crashed 51% to
850 levels around Oct-2001. The second time was the
2008-09 global financial crisis – from nearly 6,300 in
early 2008, the Nifty crashed 59% to 2,600 levels by
Mar-2009. We may well be in the middle of a third such
decadal cleansing of the market – from a high of 12,300
in Jan-2020, Nifty collapsed 38% to 7,600 levels in just
over two months, before recovering somewhat.
7
The key question – how should investors handle such
stock market crashes?
This question can be addressed from the perspective of
two kinds of investors –
1. Existing investors i.e. those already invested; and
2. Prospective investors i.e. those wanting to invest
Existing investors may well be advised to heed
Buffett’s words and stay invested through the market
cycles. The only pre-condition – they need to stay
invested in “wonderful” companies. As Buffett has also
said, “Time is the friend of the wonderful company, the
enemy of the mediocre.” During market crashes,
wonderful companies will at best suffer ‘quotational
loss’ i.e. temporary loss in stock price, followed by a
recovery. In contrast, mediocre companies will suffer
“permanent capital loss” i.e. loss not only in stock price
but in business value itself.
What constitutes a “wonderful” company will differ from
investor to investor. I evaluate companies using the
QGLP framework – Q for Quality of business and
Quality of management, G for Growth in earnings, and
L for Longevity of both, quality and growth. Finally, a
‘wonderful’ company, should also be a wonderful stock
i.e. all of QGL should be available at a reasonable
price, the P of QGLP.
For prospective investors, all such market crashes are
godsend opportunities for supernormal returns. They
get a chance to ride the “bottom-to-top cycle”. Thus,
from the Nifty top of 1,700 in Feb-2000, the next top was
6,300 in early 2008 i.e. 8-year return CAGR of 18%.
However, for investors who invested in the Oct-2001
Nifty bottom of 850, the 6.5-year return CAGR works out
to a massive 36%!
Likewise, from the 6,300 top in early 2008, the next top
was about 12,300 in early 2020. The top-to-top return
CAGR works out to just 6%. However, from the early
2009 bottom of about 2,600, the bottom-to-top return
works out to a decent 14%.
Going forward, say, the Nifty touches 25,000 in the next
8 years. From the Jan-2020 top of 12,300, the return
CAGR works out to 9%. However, from the bottom of
7,600, the return CAGR works out to a robust 16%.
Back to basics
Stock market crashes are best handled by getting back
to the basics of long-term investing. In his classic book,
100 to 1 in the Stock Market, Thomas Phelps has said,
“To make money in stocks, you must have a vision to
see, courage to buy and patience to hold. Patience is
the rarest of the three.”
Vision to see
This is the first and most critical step in long-term
investing. Stock market crashes are marked by a high
level of noise about the present and the near-term
future. This is where a clear vision of the long-term
future proves handy. Such a vision to see comes from
the long-period India story, what I call the NTD (Next
Trillion Dollar) Opportunity.
It took India almost 60 years to clock its first
trillion-dollar of GDP in FY08. After that, given the power
of compounding, the second trillion-dollar of GDP came
in just 7 years. Every next trillion-dollar (NTD) of India’s
GDP is expected to come in successively shorter
periods. This linear growth in GDP spells exponential
opportunity for several businesses run by
management with integrity competence and a growth
mindset.
Courage to buy
Warren Buffett has famously said, “Be fearful when
others are greedy and greedy when others are fearful”.
The courage to buy when the whole world is fearfully
selling arises from the above vision to see itself.
Experience also suggests that following a sharp
correction, most sound companies bounce back with a
vengeance across sectors.
Patience to hold
As Thomas Phelps’s quote itself says, patience to hold
is the rarest of the three attributes. During market
crashes, it is very difficult to catch the bottom. Investors
may see a further fall in the stock prices after they have
bought, testing investors’ patience. Only those investors
will emerge successfully from market crashes who have
full conviction in their vision and high level of patience to
see it become a reality.
In conclusion
The Coronavirus pandemic has triggered a crash in
stock markets worldwide. In India, it threatens to be the
third 50% fall since the turn of the millennium. Each
time, the trigger is different, but the outcome is broadly
the same – the fall is sharp but short-lived, and post the
recovery, investors enjoy a great run of the
“bottom-to-next-top” cycle.
Expect the Corona-led lock-down to disrupt Q1 of
FY21 at most. However, post that, multi-year low
prices of crude should help lead the recovery in GDP
and corporate sector profits. The time is ripe to invest
in “wonderful” companies i.e. great businesses
(preferably consumer-facing) run by great
managements.
Investors who stay put through this crisis, and have
the gumption to take advantage through staggered
allocation over the next 3-4 months, stand to benefit.
The Coronavirus pandemic has triggered a crash in
stock markets worldwide. In India, it threatens to be the
third 50% fall since the turn of the millennium.
In this article, I suggest that the way to handle such
stock market crashes are through the vision to see, the
courage to buy, and the patience to hold.
How to handle stock market crashes
"Unless you can watch your stock holding decline by
50% without becoming panic-stricken, you should not
be in the stock market." - Warren Buffett
Warren Buffett’s above words have proved relevant at
the market level at least twice so far this millennium.
And we may well be in the midst of the third.
The first time was the dotcom bust followed by 9/11 –
from 1,700 levels in Feb-2000, the Nifty crashed 51% to
850 levels around Oct-2001. The second time was the
2008-09 global financial crisis – from nearly 6,300 in
early 2008, the Nifty crashed 59% to 2,600 levels by
Mar-2009. We may well be in the middle of a third such
decadal cleansing of the market – from a high of 12,300
in Jan-2020, Nifty collapsed 38% to 7,600 levels in just
over two months, before recovering somewhat.
The key question – how should investors handle such
stock market crashes?
This question can be addressed from the perspective of
two kinds of investors –
1. Existing investors i.e. those already invested; and
2. Prospective investors i.e. those wanting to invest
Existing investors may well be advised to heed
Buffett’s words and stay invested through the market
cycles. The only pre-condition – they need to stay
invested in “wonderful” companies. As Buffett has also
said, “Time is the friend of the wonderful company, the
enemy of the mediocre.” During market crashes,
wonderful companies will at best suffer ‘quotational
loss’ i.e. temporary loss in stock price, followed by a
recovery. In contrast, mediocre companies will suffer
“permanent capital loss” i.e. loss not only in stock price
but in business value itself.
What constitutes a “wonderful” company will differ from
investor to investor. I evaluate companies using the
QGLP framework – Q for Quality of business and
Quality of management, G for Growth in earnings, and
L for Longevity of both, quality and growth. Finally, a
‘wonderful’ company, should also be a wonderful stock
i.e. all of QGL should be available at a reasonable
price, the P of QGLP.
For prospective investors, all such market crashes are
godsend opportunities for supernormal returns. They
get a chance to ride the “bottom-to-top cycle”. Thus,
from the Nifty top of 1,700 in Feb-2000, the next top was
6,300 in early 2008 i.e. 8-year return CAGR of 18%.
However, for investors who invested in the Oct-2001
Nifty bottom of 850, the 6.5-year return CAGR works out
to a massive 36%!
Likewise, from the 6,300 top in early 2008, the next top
was about 12,300 in early 2020. The top-to-top return
CAGR works out to just 6%. However, from the early
2009 bottom of about 2,600, the bottom-to-top return
works out to a decent 14%.
Going forward, say, the Nifty touches 25,000 in the next
8 years. From the Jan-2020 top of 12,300, the return
CAGR works out to 9%. However, from the bottom of
7,600, the return CAGR works out to a robust 16%.
Back to basics
Stock market crashes are best handled by getting back
to the basics of long-term investing. In his classic book,
100 to 1 in the Stock Market, Thomas Phelps has said,
“To make money in stocks, you must have a vision to
see, courage to buy and patience to hold. Patience is
the rarest of the three.”
Vision to see
This is the first and most critical step in long-term
investing. Stock market crashes are marked by a high
level of noise about the present and the near-term
future. This is where a clear vision of the long-term
future proves handy. Such a vision to see comes from
the long-period India story, what I call the NTD (Next
Trillion Dollar) Opportunity.
It took India almost 60 years to clock its first
trillion-dollar of GDP in FY08. After that, given the power
of compounding, the second trillion-dollar of GDP came
in just 7 years. Every next trillion-dollar (NTD) of India’s
GDP is expected to come in successively shorter
periods. This linear growth in GDP spells exponential
opportunity for several businesses run by
management with integrity competence and a growth
mindset.
8
Courage to buy
Warren Buffett has famously said, “Be fearful when
others are greedy and greedy when others are fearful”.
The courage to buy when the whole world is fearfully
selling arises from the above vision to see itself.
Experience also suggests that following a sharp
correction, most sound companies bounce back with a
vengeance across sectors.
Patience to hold
As Thomas Phelps’s quote itself says, patience to hold
is the rarest of the three attributes. During market
crashes, it is very difficult to catch the bottom. Investors
may see a further fall in the stock prices after they have
bought, testing investors’ patience. Only those investors
will emerge successfully from market crashes who have
full conviction in their vision and high level of patience to
see it become a reality.
In conclusion
The Coronavirus pandemic has triggered a crash in
stock markets worldwide. In India, it threatens to be the
third 50% fall since the turn of the millennium. Each
time, the trigger is different, but the outcome is broadly
the same – the fall is sharp but short-lived, and post the
recovery, investors enjoy a great run of the
“bottom-to-next-top” cycle.
Expect the Corona-led lock-down to disrupt Q1 of
FY21 at most. However, post that, multi-year low
prices of crude should help lead the recovery in GDP
and corporate sector profits. The time is ripe to invest
in “wonderful” companies i.e. great businesses
(preferably consumer-facing) run by great
managements.
Investors who stay put through this crisis, and have
the gumption to take advantage through staggered
allocation over the next 3-4 months, stand to benefit.
The Coronavirus pandemic has triggered a crash in
stock markets worldwide. In India, it threatens to be the
third 50% fall since the turn of the millennium.
In this article, I suggest that the way to handle such
stock market crashes are through the vision to see, the
courage to buy, and the patience to hold.
How to handle stock market crashes
"Unless you can watch your stock holding decline by
50% without becoming panic-stricken, you should not
be in the stock market." - Warren Buffett
Warren Buffett’s above words have proved relevant at
the market level at least twice so far this millennium.
And we may well be in the midst of the third.
The first time was the dotcom bust followed by 9/11 –
from 1,700 levels in Feb-2000, the Nifty crashed 51% to
850 levels around Oct-2001. The second time was the
2008-09 global financial crisis – from nearly 6,300 in
early 2008, the Nifty crashed 59% to 2,600 levels by
Mar-2009. We may well be in the middle of a third such
decadal cleansing of the market – from a high of 12,300
in Jan-2020, Nifty collapsed 38% to 7,600 levels in just
over two months, before recovering somewhat.
The key question – how should investors handle such
stock market crashes?
This question can be addressed from the perspective of
two kinds of investors –
1. Existing investors i.e. those already invested; and
2. Prospective investors i.e. those wanting to invest
Existing investors may well be advised to heed
Buffett’s words and stay invested through the market
cycles. The only pre-condition – they need to stay
invested in “wonderful” companies. As Buffett has also
said, “Time is the friend of the wonderful company, the
enemy of the mediocre.” During market crashes,
wonderful companies will at best suffer ‘quotational
loss’ i.e. temporary loss in stock price, followed by a
recovery. In contrast, mediocre companies will suffer
“permanent capital loss” i.e. loss not only in stock price
but in business value itself.
What constitutes a “wonderful” company will differ from
investor to investor. I evaluate companies using the
QGLP framework – Q for Quality of business and
Quality of management, G for Growth in earnings, and
L for Longevity of both, quality and growth. Finally, a
‘wonderful’ company, should also be a wonderful stock
i.e. all of QGL should be available at a reasonable
price, the P of QGLP.
For prospective investors, all such market crashes are
godsend opportunities for supernormal returns. They
get a chance to ride the “bottom-to-top cycle”. Thus,
from the Nifty top of 1,700 in Feb-2000, the next top was
6,300 in early 2008 i.e. 8-year return CAGR of 18%.
However, for investors who invested in the Oct-2001
Nifty bottom of 850, the 6.5-year return CAGR works out
to a massive 36%!
Likewise, from the 6,300 top in early 2008, the next top
was about 12,300 in early 2020. The top-to-top return
CAGR works out to just 6%. However, from the early
2009 bottom of about 2,600, the bottom-to-top return
works out to a decent 14%.
Going forward, say, the Nifty touches 25,000 in the next
8 years. From the Jan-2020 top of 12,300, the return
CAGR works out to 9%. However, from the bottom of
7,600, the return CAGR works out to a robust 16%.
Back to basics
Stock market crashes are best handled by getting back
to the basics of long-term investing. In his classic book,
100 to 1 in the Stock Market, Thomas Phelps has said,
“To make money in stocks, you must have a vision to
see, courage to buy and patience to hold. Patience is
the rarest of the three.”
Vision to see
This is the first and most critical step in long-term
investing. Stock market crashes are marked by a high
level of noise about the present and the near-term
future. This is where a clear vision of the long-term
future proves handy. Such a vision to see comes from
the long-period India story, what I call the NTD (Next
Trillion Dollar) Opportunity.
It took India almost 60 years to clock its first
trillion-dollar of GDP in FY08. After that, given the power
of compounding, the second trillion-dollar of GDP came
in just 7 years. Every next trillion-dollar (NTD) of India’s
GDP is expected to come in successively shorter
periods. This linear growth in GDP spells exponential
opportunity for several businesses run by
management with integrity competence and a growth
mindset.
Courage to buy
Warren Buffett has famously said, “Be fearful when
others are greedy and greedy when others are fearful”.
The courage to buy when the whole world is fearfully
selling arises from the above vision to see itself.
Experience also suggests that following a sharp
correction, most sound companies bounce back with a
vengeance across sectors.
Patience to hold
As Thomas Phelps’s quote itself says, patience to hold
is the rarest of the three attributes. During market
crashes, it is very difficult to catch the bottom. Investors
may see a further fall in the stock prices after they have
bought, testing investors’ patience. Only those investors
will emerge successfully from market crashes who have
full conviction in their vision and high level of patience to
see it become a reality.
In conclusion
The Coronavirus pandemic has triggered a crash in
stock markets worldwide. In India, it threatens to be the
third 50% fall since the turn of the millennium. Each
time, the trigger is different, but the outcome is broadly
the same – the fall is sharp but short-lived, and post the
recovery, investors enjoy a great run of the
“bottom-to-next-top” cycle.
Expect the Corona-led lock-down to disrupt Q1 of
FY21 at most. However, post that, multi-year low
prices of crude should help lead the recovery in GDP
and corporate sector profits. The time is ripe to invest
in “wonderful” companies i.e. great businesses
(preferably consumer-facing) run by great
managements.
Investors who stay put through this crisis, and have
the gumption to take advantage through staggered
allocation over the next 3-4 months, stand to benefit.
We have seen unprecedented events hit the medical
world in the form of Covid - 19 which has had its own
set of repercussions for the world financial markets
too. Over 75 central bankers across the world have
eased interest rates and we have seen a glut of
liquidity slosh the banking system
In INDIA too we saw a series of measures including
rate cuts to calm the nerves of the financial market.
Key to note however was the TLTRO (Targeted Long
Term Repos Operations) aimed at providing funds
to the corporate sector in India. We have seen a
slump in economic activity across segments and
timely funding from banks would, therefore do its
confidence-boosting job to some extent. The debate
between lives and livelihood is a raging one and
there is no one size fits all solution of the same.
We have seen developed countries be a tad more
aggressive in fiscal easing – especially the US, which
has also stepped in to buy BB-rated bonds among
other fiscal measures
There is a need to has some fiscal stimulus - and a
broad-based one to combat this deadly virus.
However, the government would be mindful of its
possible implications on the government bond yield
curve, which anyways are not finding durable takers
in domestic markets. Add to it, foreign portfolio
Debt Market - Covid Maze.. Market in Haze...Lakshmi Iyer - CIO & Head Products - Kotak Mutual Fund
investors (FPIs) have been net sellers of both India
debt and equities. RBI could be a possible saviour
here by buying bonds directly from the government
or from the secondary market to anchor sovereign
bond yields - which look otherwise attractive given
the low funding rates available.
The corporate bond market, on the other hand, is
singing a different song. We saw a recent episode of
one of the fund houses announce a winding down of
its 6 fixed income scheme towards the end of April.
Panic-stricken investors rushed to the exit gate and
redeemed across the MF industry- especially in
credit risk fund. This led to higher yields in the
corporate bond segment and we have seen yields
rise across Rating curve AAA and non AAA. Is this
investor behaving justified? Most definitely NOT.
We believe that isolated cases should be seen more
as an exception rather than the rule. Investors should
focus on asset quality and asset liquidity while
making an investment decision as also while making
an Exit from a fund. One cannot paint the canvas
with the same brush - which is a typical reaction post
any event risk in the markets. Panic causes pain
in portfolio returns - and exit makes that pain
permanent. Caution and panic have a very thin line of
differentiation.
9
Today, the gap in yield between a AAA and non AAA
asset is anywhere between 2-5%!
Fear across the board is offering an opportunity to
participate in the market. Flight to quality will be the
theme for 2020. Whoever said quality means only
AAA asset? There are well-managed companies in
non-AAA space too which do belong to big
conglomerates and are adequately capitalised.
We believe that fixed income has the potential to
offer risk-adjusted returns in today’s times. Important
is to assess one’s investment horizon and more
important one’s risk appetite. DIY (do it yourself) in
such markets may be cumbersome, hence do not
feel hesitant to engage the services of your advisor.
Important to remember - it is not the strongest of
species that survive, nor the most intelligent, but the
one most responsive to change.
Stay safe and healthy. Happy Investing
The Coronavirus pandemic has triggered a crash in
stock markets worldwide. In India, it threatens to be the
third 50% fall since the turn of the millennium.
In this article, I suggest that the way to handle such
stock market crashes are through the vision to see, the
courage to buy, and the patience to hold.
How to handle stock market crashes
"Unless you can watch your stock holding decline by
50% without becoming panic-stricken, you should not
be in the stock market." - Warren Buffett
Warren Buffett’s above words have proved relevant at
the market level at least twice so far this millennium.
And we may well be in the midst of the third.
The first time was the dotcom bust followed by 9/11 –
from 1,700 levels in Feb-2000, the Nifty crashed 51% to
850 levels around Oct-2001. The second time was the
2008-09 global financial crisis – from nearly 6,300 in
early 2008, the Nifty crashed 59% to 2,600 levels by
Mar-2009. We may well be in the middle of a third such
decadal cleansing of the market – from a high of 12,300
in Jan-2020, Nifty collapsed 38% to 7,600 levels in just
over two months, before recovering somewhat.
The key question – how should investors handle such
stock market crashes?
This question can be addressed from the perspective of
two kinds of investors –
1. Existing investors i.e. those already invested; and
2. Prospective investors i.e. those wanting to invest
Existing investors may well be advised to heed
Buffett’s words and stay invested through the market
cycles. The only pre-condition – they need to stay
invested in “wonderful” companies. As Buffett has also
said, “Time is the friend of the wonderful company, the
enemy of the mediocre.” During market crashes,
wonderful companies will at best suffer ‘quotational
loss’ i.e. temporary loss in stock price, followed by a
recovery. In contrast, mediocre companies will suffer
“permanent capital loss” i.e. loss not only in stock price
but in business value itself.
What constitutes a “wonderful” company will differ from
investor to investor. I evaluate companies using the
QGLP framework – Q for Quality of business and
Quality of management, G for Growth in earnings, and
L for Longevity of both, quality and growth. Finally, a
‘wonderful’ company, should also be a wonderful stock
i.e. all of QGL should be available at a reasonable
price, the P of QGLP.
For prospective investors, all such market crashes are
godsend opportunities for supernormal returns. They
get a chance to ride the “bottom-to-top cycle”. Thus,
from the Nifty top of 1,700 in Feb-2000, the next top was
6,300 in early 2008 i.e. 8-year return CAGR of 18%.
However, for investors who invested in the Oct-2001
Nifty bottom of 850, the 6.5-year return CAGR works out
to a massive 36%!
Likewise, from the 6,300 top in early 2008, the next top
was about 12,300 in early 2020. The top-to-top return
CAGR works out to just 6%. However, from the early
2009 bottom of about 2,600, the bottom-to-top return
works out to a decent 14%.
Going forward, say, the Nifty touches 25,000 in the next
8 years. From the Jan-2020 top of 12,300, the return
CAGR works out to 9%. However, from the bottom of
7,600, the return CAGR works out to a robust 16%.
Back to basics
Stock market crashes are best handled by getting back
to the basics of long-term investing. In his classic book,
100 to 1 in the Stock Market, Thomas Phelps has said,
“To make money in stocks, you must have a vision to
see, courage to buy and patience to hold. Patience is
the rarest of the three.”
Vision to see
This is the first and most critical step in long-term
investing. Stock market crashes are marked by a high
level of noise about the present and the near-term
future. This is where a clear vision of the long-term
future proves handy. Such a vision to see comes from
the long-period India story, what I call the NTD (Next
Trillion Dollar) Opportunity.
It took India almost 60 years to clock its first
trillion-dollar of GDP in FY08. After that, given the power
of compounding, the second trillion-dollar of GDP came
in just 7 years. Every next trillion-dollar (NTD) of India’s
GDP is expected to come in successively shorter
periods. This linear growth in GDP spells exponential
opportunity for several businesses run by
management with integrity competence and a growth
mindset.
Courage to buy
Warren Buffett has famously said, “Be fearful when
others are greedy and greedy when others are fearful”.
The courage to buy when the whole world is fearfully
selling arises from the above vision to see itself.
Experience also suggests that following a sharp
correction, most sound companies bounce back with a
vengeance across sectors.
Patience to hold
As Thomas Phelps’s quote itself says, patience to hold
is the rarest of the three attributes. During market
crashes, it is very difficult to catch the bottom. Investors
may see a further fall in the stock prices after they have
bought, testing investors’ patience. Only those investors
will emerge successfully from market crashes who have
full conviction in their vision and high level of patience to
see it become a reality.
In conclusion
The Coronavirus pandemic has triggered a crash in
stock markets worldwide. In India, it threatens to be the
third 50% fall since the turn of the millennium. Each
time, the trigger is different, but the outcome is broadly
the same – the fall is sharp but short-lived, and post the
recovery, investors enjoy a great run of the
“bottom-to-next-top” cycle.
Expect the Corona-led lock-down to disrupt Q1 of
FY21 at most. However, post that, multi-year low
prices of crude should help lead the recovery in GDP
and corporate sector profits. The time is ripe to invest
in “wonderful” companies i.e. great businesses
(preferably consumer-facing) run by great
managements.
Investors who stay put through this crisis, and have
the gumption to take advantage through staggered
allocation over the next 3-4 months, stand to benefit.
We have seen unprecedented events hit the medical
world in the form of Covid - 19 which has had its own
set of repercussions for the world financial markets
too. Over 75 central bankers across the world have
eased interest rates and we have seen a glut of
liquidity slosh the banking system
In INDIA too we saw a series of measures including
rate cuts to calm the nerves of the financial market.
Key to note however was the TLTRO (Targeted Long
Term Repos Operations) aimed at providing funds
to the corporate sector in India. We have seen a
slump in economic activity across segments and
timely funding from banks would, therefore do its
confidence-boosting job to some extent. The debate
between lives and livelihood is a raging one and
there is no one size fits all solution of the same.
We have seen developed countries be a tad more
aggressive in fiscal easing – especially the US, which
has also stepped in to buy BB-rated bonds among
other fiscal measures
There is a need to has some fiscal stimulus - and a
broad-based one to combat this deadly virus.
However, the government would be mindful of its
possible implications on the government bond yield
curve, which anyways are not finding durable takers
in domestic markets. Add to it, foreign portfolio
investors (FPIs) have been net sellers of both India
debt and equities. RBI could be a possible saviour
here by buying bonds directly from the government
or from the secondary market to anchor sovereign
bond yields - which look otherwise attractive given
the low funding rates available.
The corporate bond market, on the other hand, is
singing a different song. We saw a recent episode of
one of the fund houses announce a winding down of
its 6 fixed income scheme towards the end of April.
Panic-stricken investors rushed to the exit gate and
redeemed across the MF industry- especially in
credit risk fund. This led to higher yields in the
corporate bond segment and we have seen yields
rise across Rating curve AAA and non AAA. Is this
investor behaving justified? Most definitely NOT.
We believe that isolated cases should be seen more
as an exception rather than the rule. Investors should
focus on asset quality and asset liquidity while
making an investment decision as also while making
an Exit from a fund. One cannot paint the canvas
with the same brush - which is a typical reaction post
any event risk in the markets. Panic causes pain
in portfolio returns - and exit makes that pain
permanent. Caution and panic have a very thin line of
differentiation.
10
Today, the gap in yield between a AAA and non AAA
asset is anywhere between 2-5%!
Fear across the board is offering an opportunity to
participate in the market. Flight to quality will be the
theme for 2020. Whoever said quality means only
AAA asset? There are well-managed companies in
non-AAA space too which do belong to big
conglomerates and are adequately capitalised.
We believe that fixed income has the potential to
offer risk-adjusted returns in today’s times. Important
is to assess one’s investment horizon and more
important one’s risk appetite. DIY (do it yourself) in
such markets may be cumbersome, hence do not
feel hesitant to engage the services of your advisor.
Important to remember - it is not the strongest of
species that survive, nor the most intelligent, but the
one most responsive to change.
Stay safe and healthy. Happy Investing
The Coronavirus pandemic has triggered a crash in
stock markets worldwide. In India, it threatens to be the
third 50% fall since the turn of the millennium.
In this article, I suggest that the way to handle such
stock market crashes are through the vision to see, the
courage to buy, and the patience to hold.
How to handle stock market crashes
"Unless you can watch your stock holding decline by
50% without becoming panic-stricken, you should not
be in the stock market." - Warren Buffett
Warren Buffett’s above words have proved relevant at
the market level at least twice so far this millennium.
And we may well be in the midst of the third.
The first time was the dotcom bust followed by 9/11 –
from 1,700 levels in Feb-2000, the Nifty crashed 51% to
850 levels around Oct-2001. The second time was the
2008-09 global financial crisis – from nearly 6,300 in
early 2008, the Nifty crashed 59% to 2,600 levels by
Mar-2009. We may well be in the middle of a third such
decadal cleansing of the market – from a high of 12,300
in Jan-2020, Nifty collapsed 38% to 7,600 levels in just
over two months, before recovering somewhat.
The key question – how should investors handle such
stock market crashes?
This question can be addressed from the perspective of
two kinds of investors –
1. Existing investors i.e. those already invested; and
2. Prospective investors i.e. those wanting to invest
Existing investors may well be advised to heed
Buffett’s words and stay invested through the market
cycles. The only pre-condition – they need to stay
invested in “wonderful” companies. As Buffett has also
said, “Time is the friend of the wonderful company, the
enemy of the mediocre.” During market crashes,
wonderful companies will at best suffer ‘quotational
loss’ i.e. temporary loss in stock price, followed by a
recovery. In contrast, mediocre companies will suffer
“permanent capital loss” i.e. loss not only in stock price
but in business value itself.
What constitutes a “wonderful” company will differ from
investor to investor. I evaluate companies using the
QGLP framework – Q for Quality of business and
Quality of management, G for Growth in earnings, and
L for Longevity of both, quality and growth. Finally, a
‘wonderful’ company, should also be a wonderful stock
i.e. all of QGL should be available at a reasonable
price, the P of QGLP.
For prospective investors, all such market crashes are
godsend opportunities for supernormal returns. They
get a chance to ride the “bottom-to-top cycle”. Thus,
from the Nifty top of 1,700 in Feb-2000, the next top was
6,300 in early 2008 i.e. 8-year return CAGR of 18%.
However, for investors who invested in the Oct-2001
Nifty bottom of 850, the 6.5-year return CAGR works out
to a massive 36%!
Likewise, from the 6,300 top in early 2008, the next top
was about 12,300 in early 2020. The top-to-top return
CAGR works out to just 6%. However, from the early
2009 bottom of about 2,600, the bottom-to-top return
works out to a decent 14%.
Going forward, say, the Nifty touches 25,000 in the next
8 years. From the Jan-2020 top of 12,300, the return
CAGR works out to 9%. However, from the bottom of
7,600, the return CAGR works out to a robust 16%.
Back to basics
Stock market crashes are best handled by getting back
to the basics of long-term investing. In his classic book,
100 to 1 in the Stock Market, Thomas Phelps has said,
“To make money in stocks, you must have a vision to
see, courage to buy and patience to hold. Patience is
the rarest of the three.”
Vision to see
This is the first and most critical step in long-term
investing. Stock market crashes are marked by a high
level of noise about the present and the near-term
future. This is where a clear vision of the long-term
future proves handy. Such a vision to see comes from
the long-period India story, what I call the NTD (Next
Trillion Dollar) Opportunity.
It took India almost 60 years to clock its first
trillion-dollar of GDP in FY08. After that, given the power
of compounding, the second trillion-dollar of GDP came
in just 7 years. Every next trillion-dollar (NTD) of India’s
GDP is expected to come in successively shorter
periods. This linear growth in GDP spells exponential
opportunity for several businesses run by
management with integrity competence and a growth
mindset.
Courage to buy
Warren Buffett has famously said, “Be fearful when
others are greedy and greedy when others are fearful”.
The courage to buy when the whole world is fearfully
selling arises from the above vision to see itself.
Experience also suggests that following a sharp
correction, most sound companies bounce back with a
vengeance across sectors.
Patience to hold
As Thomas Phelps’s quote itself says, patience to hold
is the rarest of the three attributes. During market
crashes, it is very difficult to catch the bottom. Investors
may see a further fall in the stock prices after they have
bought, testing investors’ patience. Only those investors
will emerge successfully from market crashes who have
full conviction in their vision and high level of patience to
see it become a reality.
In conclusion
The Coronavirus pandemic has triggered a crash in
stock markets worldwide. In India, it threatens to be the
third 50% fall since the turn of the millennium. Each
time, the trigger is different, but the outcome is broadly
the same – the fall is sharp but short-lived, and post the
recovery, investors enjoy a great run of the
“bottom-to-next-top” cycle.
Expect the Corona-led lock-down to disrupt Q1 of
FY21 at most. However, post that, multi-year low
prices of crude should help lead the recovery in GDP
and corporate sector profits. The time is ripe to invest
in “wonderful” companies i.e. great businesses
(preferably consumer-facing) run by great
managements.
Investors who stay put through this crisis, and have
the gumption to take advantage through staggered
allocation over the next 3-4 months, stand to benefit.
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COVID-19: Impact on Global EconomyDeveloped Economies likely to de-grow; Emerging Markets to still witness some growth
Response from Key Central Banks: Focus on Maintaining Liquidity to help Absorb Economic Shocks
Source: CIEL, IMF, Moody’s, S&P Global
Source: IMF, RBI
Covid - 19 containment measures, including strict lockdown and quarantine measures, put in place by governments, likely to impact economic activities and growth
European countries such as Italy, Spain, and France are in acute phases of the epidemic, followed by the United States, where the number of active cases are growing the fastest
Positive Trends:
United States
Fiscal Measures -
- US announced historic $2.3 Trillion (~11% of GDP) stimulus package
Key Monetary Policy Measures Taken By The US Fed -
- Slashed its benchmark interest rate to 0-0.25%, a $700 billion stimulus program
- Fed unveiled $2.3 Trillion stimuli targeted at mid-size businesses and purchase notes directly from states and counties
- Fed to purchase an unlimited amount of Treasuries and securities tied to residential and commercial real estate to prevent credit crunch
- New lending programmes worth $300 Billion to support financial markets
Euro Zone
Fiscal Measures -
- Announced fiscal package to the tune of €37 Billion (~0.3% of 2019 EU27 GDP)
Key Monetary Policy Measures Taken By ECB -
- Additional €750 Billion ($820 Billion) asset purchase program of private and public sector securities (Pandemic Emergency Purchase Program) until end of CY20
- Additional asset purchases worth €120 Billion ($132 Billion) until end of CY20
- Left the rate on main refinancing operations at a record low of 0%
- Relaxation of collateral standards for Eurosystem refinancing operations (MROs, LTROs, TLTROs)
Japan
Fiscal Measures -
- Announced fiscal package of ¥446 Billion (~0.1% of GDP)
Key Monetary Policy Measures Taken By BoJ -
- BoJ pledged to buy ¥200 Bn ($1.90 Billion) of 5-10-year Japanese Govt bonds
- Injected an additional ¥1.5 Trillion in two-week loans
- An increase in the annual pace of BoJ’s purchases of Exchange Traded Funds (ETFs) and Japan-Real Estate Investment Trusts (J-REITs)
- Increase in the targeted purchase of commercial paper and corporate bonds
India
Fiscal Measures -
- The government announced a ` 1.7 Trillion relief package (~1% of GDP)
Key Monetary Policy Measures Taken By RBI -
- Repo rate cut from 5.15% to 4.4%, reverse repo rate cut from 4.9% to 4%
- 100 bps reduction in CRR for banks to 3% to encourage lending
- MSF raised from 2% of SLR to 3% (up to June 3, 2020)
- LTROS of up to 3-yrs tenor for a total amount of ` 1 Lakh Crore
- 3-month moratorium on loans with no credit downgrading
Modest improvement in economic activity in China is reflected in daily satellite data on nitrogen dioxide concentrations in the local atmosphere—a proxy for industrial and transport activity
Recovery in China is encouraging, suggesting that containment measures can succeed in controlling the epidemic and pave the way for a resumption of economic activity
GDP forecast by major rating agencies indicates that despite the slowdown, India to remain amongst the fastest growing economies in CY20
GDP Growth Projection For CY 2020Area Moody’s S&P
World -0.5 0.4
USA -2 -1.3
Eurozone -2.2 -2
Japan 0 -1.2
China 3.3 2.9
India 2.5 3.5
The Coronavirus pandemic has triggered a crash in
stock markets worldwide. In India, it threatens to be the
third 50% fall since the turn of the millennium.
In this article, I suggest that the way to handle such
stock market crashes are through the vision to see, the
courage to buy, and the patience to hold.
How to handle stock market crashes
"Unless you can watch your stock holding decline by
50% without becoming panic-stricken, you should not
be in the stock market." - Warren Buffett
Warren Buffett’s above words have proved relevant at
the market level at least twice so far this millennium.
And we may well be in the midst of the third.
The first time was the dotcom bust followed by 9/11 –
from 1,700 levels in Feb-2000, the Nifty crashed 51% to
850 levels around Oct-2001. The second time was the
2008-09 global financial crisis – from nearly 6,300 in
early 2008, the Nifty crashed 59% to 2,600 levels by
Mar-2009. We may well be in the middle of a third such
decadal cleansing of the market – from a high of 12,300
in Jan-2020, Nifty collapsed 38% to 7,600 levels in just
over two months, before recovering somewhat.
The key question – how should investors handle such
stock market crashes?
This question can be addressed from the perspective of
two kinds of investors –
1. Existing investors i.e. those already invested; and
2. Prospective investors i.e. those wanting to invest
Existing investors may well be advised to heed
Buffett’s words and stay invested through the market
cycles. The only pre-condition – they need to stay
invested in “wonderful” companies. As Buffett has also
said, “Time is the friend of the wonderful company, the
enemy of the mediocre.” During market crashes,
wonderful companies will at best suffer ‘quotational
loss’ i.e. temporary loss in stock price, followed by a
recovery. In contrast, mediocre companies will suffer
“permanent capital loss” i.e. loss not only in stock price
but in business value itself.
What constitutes a “wonderful” company will differ from
investor to investor. I evaluate companies using the
QGLP framework – Q for Quality of business and
Quality of management, G for Growth in earnings, and
L for Longevity of both, quality and growth. Finally, a
‘wonderful’ company, should also be a wonderful stock
i.e. all of QGL should be available at a reasonable
price, the P of QGLP.
For prospective investors, all such market crashes are
godsend opportunities for supernormal returns. They
get a chance to ride the “bottom-to-top cycle”. Thus,
from the Nifty top of 1,700 in Feb-2000, the next top was
6,300 in early 2008 i.e. 8-year return CAGR of 18%.
However, for investors who invested in the Oct-2001
Nifty bottom of 850, the 6.5-year return CAGR works out
to a massive 36%!
Likewise, from the 6,300 top in early 2008, the next top
was about 12,300 in early 2020. The top-to-top return
CAGR works out to just 6%. However, from the early
2009 bottom of about 2,600, the bottom-to-top return
works out to a decent 14%.
Going forward, say, the Nifty touches 25,000 in the next
8 years. From the Jan-2020 top of 12,300, the return
CAGR works out to 9%. However, from the bottom of
7,600, the return CAGR works out to a robust 16%.
Back to basics
Stock market crashes are best handled by getting back
to the basics of long-term investing. In his classic book,
100 to 1 in the Stock Market, Thomas Phelps has said,
“To make money in stocks, you must have a vision to
see, courage to buy and patience to hold. Patience is
the rarest of the three.”
Vision to see
This is the first and most critical step in long-term
investing. Stock market crashes are marked by a high
level of noise about the present and the near-term
future. This is where a clear vision of the long-term
future proves handy. Such a vision to see comes from
the long-period India story, what I call the NTD (Next
Trillion Dollar) Opportunity.
It took India almost 60 years to clock its first
trillion-dollar of GDP in FY08. After that, given the power
of compounding, the second trillion-dollar of GDP came
in just 7 years. Every next trillion-dollar (NTD) of India’s
GDP is expected to come in successively shorter
periods. This linear growth in GDP spells exponential
opportunity for several businesses run by
management with integrity competence and a growth
mindset.
Courage to buy
Warren Buffett has famously said, “Be fearful when
others are greedy and greedy when others are fearful”.
The courage to buy when the whole world is fearfully
selling arises from the above vision to see itself.
Experience also suggests that following a sharp
correction, most sound companies bounce back with a
vengeance across sectors.
Patience to hold
As Thomas Phelps’s quote itself says, patience to hold
is the rarest of the three attributes. During market
crashes, it is very difficult to catch the bottom. Investors
may see a further fall in the stock prices after they have
bought, testing investors’ patience. Only those investors
will emerge successfully from market crashes who have
full conviction in their vision and high level of patience to
see it become a reality.
In conclusion
The Coronavirus pandemic has triggered a crash in
stock markets worldwide. In India, it threatens to be the
third 50% fall since the turn of the millennium. Each
time, the trigger is different, but the outcome is broadly
the same – the fall is sharp but short-lived, and post the
recovery, investors enjoy a great run of the
“bottom-to-next-top” cycle.
Expect the Corona-led lock-down to disrupt Q1 of
FY21 at most. However, post that, multi-year low
prices of crude should help lead the recovery in GDP
and corporate sector profits. The time is ripe to invest
in “wonderful” companies i.e. great businesses
(preferably consumer-facing) run by great
managements.
Investors who stay put through this crisis, and have
the gumption to take advantage through staggered
allocation over the next 3-4 months, stand to benefit.
COVID-19: Advantage IndiaSilver Lining amidst Global Slowdown
FPI Flows: Important Drivers of Indian Stock Markets
MSCI Rejig - MSCI India’s weight in the EM index is expected to rise to ~9.6%, which would imply inflows of $7.1 billion into the Indian Equity Market
Easy Monetary Policy - The US Federal Reserve has opened up the liquidity tap indefinitely, and domestically RBI is likely to keep policy rates low and widen the surplus liquidity in the system. Excess liquidity is likely to chase EM equities for higher returns
Medical Solution - Appetite for risky assets likely to improve as concerns around the spread of Covid - 19 are contained with the development of a vaccine or medication against it
India - Importing ~85% of its Oil Requirement, to benefit from Oil Prices Slump
Likely to lower oil import bill ($10/barrel saving = $ 15 billion Import savings) & ease of CAD & WPI (10.36% weight)
Excise duty increase by the government to lead to windfall gains & can be used to bridge fiscal deficit or welfare spends
Slowing global demand to help sustain lower oil prices, despite future production cuts by OPEC
India to emerge as a major beneficiary of China Plus-One Strategy for Global Cos.
Local supply chain being set up by Indian businesses to de-risk from China, lower manufacturing costs, & escape high import duties levied by government
Competitive advantage in terms of land & labour availability, improving ease of doing business and government's infra push (e.g. USD 6 billion announced last month to boost electronics manufacturing) makes India as global manufacturing destination to diversify supply chains
Competitive infrastructure & incentives like duty-free exports, tax benefits etc. provide export manufacturing opportunities for foreign firms in SEZs & free trade zones
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Gold: Always a Safe Haven Asset
Gold movement has been negatively co-related to real interest rate since the first QE; with central banks expected to print more money, case for gold becomes stronger
Recent volatility in gold prices has been driven by massive liquidation across all assets, gold has likely been used to raise cash to cover losses in other asset classes
The deceleration in economic growth may impact consumer demand and gold’s volatility may remain high, but high risk levels combined with widespread negative real rates and quantitative easing likely to support gold demand as a safe haven
Absolute Returns in % terms, INR Returns*Ongoing Covid-19 Crisis
Source: World Gold Council, Data as on 31st March 2020
Recessionary PeriodsGold
PerformanceSensex
Performance
March 2001 - Nov 2001
Dec 2007 - June 2009
*Jan 2020 - March 2020
6.51%
44.53%
11.96%
-29.14%
-26.06%
-28.66%
Our Equity StrategySell Off Across Sectors and Market Caps As FIIs Flee Risky Assets; DII Inflows Remain Strong
Positive
Neutral
Negative
Valuations
Earnings
Volatility
1. Valuations appear attractive across the market cap spectrum due to Covid - 19 fear led sell-off in EM equities
2. Fiscal and monetary stimulus packages, along with the possibility of a current account surplus owing to crude decline to aid substantially
1. Highly leveraged companies or those with high fixed costs as a percentage of revenues likely to report lower income margins, given topline growth headwinds due to economic downturn
2. Earnings downgrade may be expected in high impact sectors such as aviation, hotels, restaurants, jewellery, retail, shipping & ports
1. FPIs liquidation of INR assets to persist in near-term as uncertainties unfold; further fiscal & monetary measures to dictate flows
2. Volatility likely to remain elevated as global trade data & its implications get clearer for market participants
1
2
3
Our Equity Allocation Strategy
Our Investment Strategy
1. India, as well as global markets, seem to have witnessed the steepest fall in recent history – making valuations look extremely attractive across market caps
2. Large-caps expected to lead the road to recovery with some bit of lag in broader market participation – ideal to start with large-cap allocations followed by Mid and Small caps subsequently
3. ‘Risk Mitigation’ of client portfolios has been our endeavour all through our journey – continued focus on Hedge and Long-short strategies has helped us safeguard client portfolios
Domestic indices fell sharply owing to Covid - 19 led economic disruptions and slowdown
Foreign Portfolio Investors (FPIs) logged the worst sell-off last month with equity markets witnessing record losses due to the rising number of Covid - 19 cases across
Banking and finance counters witnessed heavy selling pressure arising from concerns over a deterioration in asset quality due to the disruption in economic activities
Intermittent gains in the global equities after the US government announced a $2.3 trillion stimulus package to soften the economic blow of Covid - 19 outbreaks supported the local indices along with the inflows from the Domestic Institutional Investors (DIIs)
-36.23-34.00
-30.47-29.64-28.90
-27.98-27.42
-25.91-23.85-23.23-23.03-22.85
-18.64-18.52-17.85
-14.75-14.31
-9.72-6.47
S&P BSE Realty Index - TRI
S&P BSE BANKEX - TRI
S&P BSE AUTO Index - TRI
S&P BSE Small-Cap - TRI
S&P BSE METAL Index - TRI
S&P BSE Capital Goods - TRI
S&P BSE Mid-Cap - TRI
S&P BSE Consumer Durables - TRI
S&P BSE 500 - TRI
S&P BSE 200 - TRI
NIFTY 50 - TRI
S&P BSE Sensex - TRI
S&P BSE Power Index - TRI
S&P BSE OIL & GAS Index - TRI
S&P BSE Telecom - TRI
S&P BSE TECk Index - TRI
S&P BSE IT
S&P BSE Health Care - TRI
S&P BSE FMCG
Sector Performance – March 202027921.7
-61972.75-80000
-60000
-40000
-20000
0
20000
40000
MF FII Trend (Cr)MF FII
Data as on 31st March 2020; Source: Accord Fintech
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Our Debt StrategyDebt Markets Turned Volatile As FIIs, Global Central Banks, RBI & Government Actions Come Into Play
Our Fixed Income Allocation Strategy
Positive
Positive
Neutral
Interest Rates
Liquidity
Credit Risk
1
2
3
1. RBI announced a cut in the repo and reverse repo rate, reduction in the CRR by 100 bps to encourage lending; lending rates likely to go down as transmission improves
2. Interest rates to remain low as easy monetary policies prevail globally to support the economies
1. RBI’s aggressive rate cut with an injection of liquidity of ` 3.74 lakh crores in the system under the new program likely to channelize the abundant liquidity meaningfully
2. With an expansion of LTRO, banks are required to source 50% of their incremental holdings from the secondary market, this will provide substantial liquidity to other market participants
1. Credit remains unattractive and expensive with risk-reward being unsupportive as the slowdown is likely to increase balance sheet stress
2. Due to a halt in economic activity, the coming year is likely to see more downgrades than upgrades
Our Investment Strategy
1. Significant opportunity in the elevated Corporate Bond spreads (AAA) over G-Sec and Repo Rate in the lower end of the yield curve (Average Maturity 1 to 2 years)
2. We continue to remain averse to Credit Risk (A & below-rated securities) considering the risks arising from the impact of Covid - 19 lockdown
3. IDFC FIRST Bank FD for tenure 1 to 2 years & IDFC FIRST Bank Savings Account for tenure < 1 year (Interest up to 7% pa) are preferred
4. Good quality Bond funds, Dynamic Allocation funds and Banking / PSU strategies are preferred for long term allocations
6.12%
5.5%
6.0%
6.5%
7.0%
7.5%
8.0%
India - 10 Year Gsec
-4831.9
-60375.81-80000
-60000
-40000
-20000
0
20000
40000
60000
MF FII Debt Trend (Cr)
MF FII
Yields in %
Global Bond Yields 7-Apr-20 31-Mar-20 1 M 1Y
US 10 – Year 0.71 0.67 1.24 2.5
UK 10 – Year 0.41 0.35 0.44 1.12
Germany 10 – Year -0.31 -0.47 -0.63 0.01
Japan 10 – Year 0.01 0.01 -0.16 -0.04
India 10 – Year 6.40 6.12 6.39 7.33
Globally, bond yields fell as major central banks cut the monetary policy rates
Debt markets remained volatile and corporate bond spreads widened significantly during the month due to redemption pressure
Much needed relief from RBI as it infused ` 3.74 lakh crore of liquidity through various measures – Targeted Long Term Repo Operations of 3 year tenor of ` 1 Lakh Cr used to buy corporate bonds and commercial papers aided in the contraction of the spreads
10 Year Gsec yields have risen again as Centre frontloaded the FY21 borrowing (` 600 bn from the market in April'20 out of the Centre's plan of ` 4.88 trn borrowing through bonds) and ruled out a direct placement of debt with the central bank
Source: IDFC MF, Bloomberg, data as on 31st March 2020
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Strategy of the Quarter
IIFL High Conviction Fund – Cat III AIF
Strategy Round-up:
The investment strategy of the fund will be to seek long-term capital appreciation, by investing in equity, equity-related and other permissible securities of companies.
Investment Philosophy:
It is a High Conviction Fund where investment is concentrated on 15-20 companies. Follows a robust investment framework at AMC level and unique strategy at the fund level, briefly
described as follows; 40-70% are secular growth companies - companies delivering 15% PAT and ROE growth rates,
playing out India’s secular upward growth shift. 30-50% are cyclical and defensive growth companies - high growth companies that typically
have high capital expenditures and hence a lower ROE. 0-10% value trap companies - low growth rates and ROE; these are typically avoided across
public equity strategies. The fund follows a mix of top-down (macro analysis to identify sectors) and bottom-up approach
(microanalysis to pick stocks within these sectors). The scheme will not have more than 10% allocation to any single security after full deployment
Identifying a high growthindustry or sector
Companies with a competitive advantage and consistent
higher ROE than peers
Companies with stronggovernance focused on
prudent capital allocation,in line with minority shareholder interest
Companies with attractivevaluations offering a favourable
risk-reward ratio
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*performance as on 30th April, 2020
Performance of IIFL High Conviction Fund:
Scheme Name Performance (%)
1M 2M 3M YTD Since InceptionStrategy 12.16
14.71 -20.57-11.93
-19.94-18.07
-22.12-17.47
-20.01-17.19BSE 200 TRI
Luxe Spotlight -Virtual Museum Tours
We have always strived to bring you the best of both worlds. This time around, we treat your senses to 4 captivating virtual museum tours, that you could enjoy from the comfy nook of your homes.
Making the MET 1870s – 2020April marked the 150th anniversary of the foundation of the renowned Metropolitan Museum of Art in New York. Sit back and trace the historical transformation of this iconic cultural landmark from 1870-2020 online.
1
2
3
Mars as Art: Beauty and Discovery on the Red PlanetA magnetic bed that floats two feet above the surface might sound too good to be true. However for a hefty price of $1.6 million you too can sleep on the clouds.
4
https://artsandculture.google.com/exhibit/making-the-met-1870%E2%80%932020/GQLS-pBlvVqAJQ
https://artsandculture.google.com/exhibit/mars-as-art-beauty-and-discovery-on-the-red-planet/mQIynG8hjzJmLA
Astronomy at the Palace of Versailles The former royal residence of Louis XIV, this historic palace is as much a harbinger of science as it is an abode of art. Take this fascinating journey through this online photo gallery to find out just how.https://artsandculture.google.com/exhibit/sciences-at-versailles-part-2-astronomy-queen-of-sciences%
C2%A0/fgLSnpjEa-CTKw
The creation of the Statue of Liberty | Musée des arts et métiersFlip through the pages of history and look behind the grandeur of the famous statue of liberty in photographs – online visual storytelling at its best.https://artsandculture.google.com/exhibit/the-construction-of-the-statue-of-liberty/QRWHcXMU
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DISCLAIMERThis document has been prepared by IDFC FIRST Bank Limited based on information obtained from public sources and sources believed to be reliable, but no independent verification has been made nor is its accuracy or completeness guaranteed. The contents of this report are solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments or any other product. Nothing in the report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to the investor's circumstances. While due care has been taken in preparing this document, IDFC FIRST Bank and its affiliates accept no liabilities for any loss or damage of any kind arising out of any inaccurate, delayed or incomplete information nor for any actions taken in reliance thereon.
The securities/funds discussed and opinions expressed in this mail may not be suitable for all investors, who must make their own investment decisions, based on their own investment objectives and financial position. Please be informed that past performance is not necessarily a guide to future performance. Actual results may differ materially from those set forth in projections. Unless expressly stated, the performance of products is not guaranteed by IDFC FIRST Bank or its affiliates. The information provided may not be taken in substitution for the exercise of independent judgement by any investor.
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