Covid, Human Behaviour and Investing

If you go back to history whether the Spanish flu, the Great Depression, the World Wars, 9/11, etc., all had one thing in common. Humans are emotional and we lose hope due to external stimuli extrapolating our current state to future.

June 03, 2020 12:13 IST | India Infoline News Service
Abhimanyu Sofat, IIFL
One of the important things that human history has taught us is that for all successful people the amount of luck has played in success is not known to us. Covid-19 is something, which is led to many successful people right now searching for answers to provide an explanation for the unprecedented impact of Covid-19. If you go back to history whether the Spanish flu, the Great Depression, the World Wars, 9/11 etc., all had one thing in common. Humans are emotional and we lose hope due to external stimuli extrapolating our current state to future. People who were born in 1930s to 1960s typically had many siblings and used to stay in joint family. However, people born after 1990 will tend to have lesser siblings and are more likely to stay in a nucleus family. Their sense of economic and emotional security would be very different.  

In addition to economic environment in which we are staying, progress of medical science also has a critical factor to play in this. The life expectancy in India has risen from 40 in 1960 to 70 currently. If you look at the impact of such things on investing, it is something that is overwhelming. Which products will sell, which companies will prosper depend a lot on mortality rate and life expectancy. The returns that an investor would experience for example in Indian stock market between 1992 to 1998 would be very different relative to a person who would have invested in the Indian market from 2004 to 2007. In last 10 years, if somebody would have invested in high beta leveraged companies, which were the darling of the Capital Market in 2007, they would have had a bad experience considering that most of the infrastructure stocks have given negative return over the past decade. One pattern that one can clearly see is that every bull market tends to have different leaders. For example, the bull market, which finished some months back, had banking as the leader, with more than 40% weight in index. If you asked a wealth manager for a generic review on a portfolio of Nifty index stocks showing only sector weight, most likely the true wealth manager will haul you up for too much concentration. However, at the same time you listen to financial pundits recommending buying the index for diversified returns. Before that during the 2007 market bull-run, infrastructure was the leader. In in the bull market until 1992 old economy stocks were the leaders. Each cycle has its own set of opportunities own set of challenges? Each cycle provides identities to new set of leaders, who were nowhere to be seen in 5 years. We all feel that some managements, which seems great, were average in hindsight when the downturn happens. Some managements, which are very consistent but are not appreciated since they are not the fastest growing, are the compounding stories.

It is critical for investors to focus on patterns recognition, which the market is right now going through. What are the changes that one is seeing and based on that adjust himself will define our returns in addition to the critical icing i.e. luck. Let try to crystal gaze what can come out of covid-19. Well, the first thing what one will clearly see is that urbanization of humankind is going to reduce over next couple of years. They will bring change in the way people value life, income, savings etc. Also because of Work from home, commercial real estate demand may decline in the near future. Yes, they will be some opportunities here and there to invest in real estate companies because of low valuations. However, the important thing is that the shift in mind-set to work from home is going to lead to lot of industries shifting to that. The reason is non- HR overheads (seat cost) can depress ROE of a business significantly. Cost workstation, electricity, AC, canteen, etc. are all part of such seat cost. I remember when I had a start-up, until we had an office address the customer felt un- comfortable. Well covid-19 might change that for current start-ups who may have only virtual offices. The second thing that is clearly visible is that the shared Mobility which was becoming popular with the advent of Ola and Ubers of the world. Covid 19 is likely to put this shift in reverse gear. It is quite likely demand for cycles, two wheelers and small cars will rise. Yes, India's per capita Income is $2,200, which may not sustain demand for large cars but is good enough to buy a two-wheeler or a Maruti car. The other change, which is quite likely, is the expansion of ott platforms such as Netflix and Prime or UGC platforms such as twitter, YouTube, tiktok etc. In fact, matrimony sites are seeing surge in usage as people shift from tinder to spend time considering a person is locked up with family whole day! Therefore, I believe such platforms will continue to gain market share. Less number of people who will go to malls as more people will buy online. Platforms like Zoom and MS office are here to stay as people recognize the cost advantage of being viral. These pattern changes would be visible in pharma industry as one see people focussing on contact developing and manufacturing organizations (CDMO), API manufacturers etc. We may also see new segments emerging such as FMHG (Fast Moving Healthcare goods) as we see a shift of focus to nutrient intake.

As people become more aware of social security due to lower incomes and miniscule returns from different asset classes, human are bound to become more un-secure. As a result, the likelihood of buying an insurance whether life or non-life will increase drastically and structurally. The other changes that one can clearly see is people will focus on their home more today when we work from home. We realize many things, which are required for working for home, are not available. So maybe a better broadband connection, chair etc.  With a share similar to office maybe a better. In addition, increase in demand of cookware like pressure cookers, dishwasher etc. may increase. These kind of pattern changes are something that clearly we should be looking at going forward.
With global interest rates being close to zero, there is a massive repercussion in terms of retirement planning for us going forward. It will be very difficult for people to earn money on their savings in such an economic scenario. People may have more security in buying a house then renting, as they are not certain about the opportunity cost of using the money for investment in other asset classes. Once the house is theirs, there monthly outflow would reduce. Secondly. There are question marks on the credit worthiness of lot of companies.

Overall Market scenario has become volatile. Would that change to pre-covid the moment we get a vaccine? Well, the answer to that is not that easy that it will go to normal. Until we see sufficient supply of vaccine, we would see depressed business confidence going forward. So would companies revert to normal operations post opening of lockdown? As there will be a fear in the mind of corporates that the coronavirus kind of issue can re-occur they will continue to be cautious. So even if cost of capital of a business reduces they will continue to be slow on capex and focus on maintaining cash inflows. Such mind-set at an aggregate level will increase supply of money. Also in such lower rate environment, income of cash balances will decline. Hence, prospects of a v-shaped recovery for a poor nation like India are difficult. A question is often asked – “do you think so that market is reflective of the economy?”. Earlier people would say ‘yes’, but now the answer is ‘no’, because what happens is that certain stocks of the index , which were doing pretty well earlier tend to have higher weight in the index which may not be in sync with the real economy. Some of the sectors, which provide huge employment such as construction, food, transport, tourism etc., have a miniscule weight in the index. None of those is right now captured by the major indices and because of that, the index is not reflective of the overall Market scenario.

To summarize, one needs to focus on seeing the consistency of behaviour change, make a portfolio, which is diversified recognizing the change, and accept the reality. 

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