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April Roundtable: Kristal Experts On A Post-COVID World
We are witnessing the evolution of change.
In his recent letter to Blackrock’s shareholders, CEO Larry Fink wrote about how what we are seeing today is not a financial crisis in the real meaning of the word, but a crisis of confidence. This is not a bubble bursting, or a sector collapsing. But though this recession is not borne out of a structural fault, it will definitely lead to long-standing structural changes in our world.
In times like these, the best thing to do is to look at experts and ask for healthy, sane advice. So, for our April roundtable, we asked three of our partner firms for their views on the topic. Here’s what they each had to say:
Anand Ramachandran, River Valley Asset Management
Partner and Fund Manager at RVAM, Anand Ramachandran is also an opinionated writer of in-depth monthlies. You can read his current newsletter up here.
About COVID, Ramachandran has this to say: “The next few months are likely to be uncertain as markets remain volatile while investors find their footing. Humans have an innate inability to understand very large or very small numbers. “The virus multiplies exponentially!!!! Oil supply will shoot up while demand craters!” All superlative statements with no insight on the scale or a desire to calibrate. This always results in overreaction and rising volatility driving market risk premiums. We do this on the upside and we will inevitably do so on the downside.
This is why the investment process becomes so much more psychological than purely mathematical. As far as a business is concerned, this does not change the long term value anchor of a business – its cashflow generating ability. But with rising risk premiums, the way the cash flows are valued becomes volatile. However, investors need to ride through the short term gyration in risk premiums.
Our experience is that dislocations like these, driven by unexpected short term events, leave behind a wealth of ‘investment opportunities of a lifetime’. When fear overtakes rationality, the market leaves greed behind and we witness indiscriminate selling, providing valuable opportunities to build up long term positions in well-run companies that are rarely available at cheap prices. The key to capturing these opportunities is to be patient and disciplined with enough liquidity available to pick up ideas as and when they present themselves.”
Susanta Mazumdar, Co-Founder & Portfolio Manager at JN Asia Infrastructure Fund
Travel and infrastructure sectors have been the first victims of this pandemic. We asked Susanta for his views on how these sectors in the APAC region will be affected.
He says: “Within the APAC infrastructure space, the segments which depend on human mobility viz. transportation infrastructure, have been hit badly due to a lack of traffic in the near term. On the other hand, segments viz. aging demographics (retirement villages), waste management companies, data infrastructure, and utilities have been de-rated with rising equity risk premium; even though their operation is largely unaffected.
In the short term we expect, widening corporate debt spreads may lead to higher funding cost and tighter liquidity. However, we believe quality infrastructure companies will be able to showcase their balance sheet strength during this period. There could be a reduction or cancellation of dividend for companies in the transportation and logistics segment. Also, there will be risks linked to potential supply chain breakdowns, consumption or retail slowdown, impact on real estate at transport gateway hubs.
Risk spreads will normalize (both equity risk premium and corporate debt spread) as the financial system stabilizes and liquidity improves. This can lead to a reduction in cap rates and higher multiples on cash flow yields. We believe infrastructure assets will benefit from lower real cost of capital. Lastly, the higher focus on environmental awareness will lead to better business for waste management, renewable, gas distribution companies.
However, I believe that over the long term, the impact of COVID-19 will be more positive on the infrastructure sector in comparison to the near-term negative impact. Beyond the next 6-12 months, we expect business travel and public transport-related travel to recover post containment of COVID-19 while discretionary travel to recover slower. Importantly, interest rates could stay lower for longer.”
Sanjay Guglani (Founder and CIO) of Silverdale Funds
As I write this, New York, Italy, France, and Spain have seen their weekly COVID numbers go down, raising hopes of an approaching plateau of the virus spread. Even though it is early days in this fight, talk has already shifted to ‘when’ and ‘how’ we are going to recover from this.
Sanjay is of the opinion that “the recovery would be fairly swift but with a clear shift to ecommerce, and lifestyle brands that support social distancing or remote working like tele-meetings. The earnings for the June quarter will bear the brunt of the lockdown. On the other hand, the worst for credit markets looks to be over, especially with the Federal Bank and ECB back-stopping the markets, and fiscal stimulus announced by various Governments.
The panic we saw in the initial weeks of March (‘sell what you can’) is currently being replaced with ‘flight to safety’. Investment Grade bonds have seen marked appreciation in prices this week and are expected to continue to appreciate over the coming months. As regards non-investment grade bonds, one needs to be highly selective. Given huge uncertainties, it would be prudent to stick to shorter-duration bonds. Savvy investors can take advantage of significantly lower borrowing costs, to enhance their returns. As always, it would be better to invest through a broad-based fund, rather than taking monoline idiosyncratic risks.”
The sane among us have always talked about how emotions and investments do not make happy bedfellows. There is no better time than right now to keep one’s emotions in check (strange as it may seem) and invest with clear logic and rules. If you have ample dry powder on the sidelines, now is the time to make it work. Take a cue from history – the crash of 2008 turned out to be one of the best buying opportunities for investors. Now could be the same if you invest wisely.
Companies with a strong market value will bounce back post the pandemic. If you’re buying, do not look for highly-leveraged names or companies in weak competitive positions. Buy stocks from notable names at low prices and wait for the dividend. Or, invest in the Teslas and Zooms of the world which will become the new leaders of the changed world order. And if it gets too hard to decide, use the Kristal algorithm to decide what you can and should buy. Trust the algo – that is the mantra I have been telling everyone.
Times are hard, and there will be much short-term pain for all of us. This is far from over. Will there be a vaccine soon? Will we be able to go out and live our lives as we normally did again? My guess is as good as yours. I do believe that we will come out of this changed for the better, and maybe with some deeply-instilled family values 🙂
While we live through this, do know that I and my team at Kristal.AI are here for you if you have any concerns or questions about your portfolios. You can always talk to us at email@example.com (or firstname.lastname@example.org if you are in India) for a portfolio check. Or, for anything else. As always, we’ve got your back.
Stay tuned to Tracking COVID-19. The next post of the series, dives into Expert Tips to Survive Your First Stock Market Crash.
The materials and data contained herein are for information only and shall in no event be construed as an offer to purchase or sell or the solicitation of an offer to purchase or sell any securities in any jurisdiction. Kristal Advisors does not make any representation, undertaking, warranty or guarantee as to the update, completeness, correctness, reliability or accuracy of the materials and data herein. All opinions, forecasts or estimation expressed herein are subject to change without prior notice. Kristal Advisors and its affiliates accept no liability or responsibility whatsoever for any direct or consequential loss and/or damages arising out of or in relation to any use of opinions, forecasts, materials and data contained herein or otherwise arising in connection therewith.
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