What if your portfolio gets infected by Ebola? - The 5 Minute WrapUp by Equitymaster
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What if your portfolio gets infected by Ebola?

Dec 15, 2014

In this issue:
» Will higher credit offtake ease rate cut pressure?
» Optimism regarding exports growth could be misplaced
» Is black money making a comeback via gold?
» and more....

For any student of history, no chapter is complete without reference to war and bloodshed. Innumerable wars and political crises have ravaged humanity since time immemorial. And in many ways, they tend to shape and define the history of man on this planet.

But there is another acutely critical factor that has probably played a much greater role in defining history than human conflict. Can you guess what it is? The answer is diseases and epidemics.

Consider this fact for instance... The influenza pandemic of 1918-1919 claimed more lives in a year than World War I did in four years. It infected about a fifth of the world's population and as per estimates, killed somewhere between 20 and 40 million people.

That brings us to the discussion on the Ebola outbreak, the deadly virus disease that has wreaked havoc in several West African countries and is threatening to spread globally. In a man to man conflict, you at least know your enemy. You can guess his intentions and tactics and prepare for war accordingly.

But what do you do when your enemy is an invisible virus that is about 80 nanometers in width and about 14,000 nanometers in length (1 meter equals 1,000,000,000 nanometers). Despite all of mankind's advancements in medicine and technology, there is yet no specific treatment approved for Ebola. According to World Health Organisation (WHO), the death toll in the three worst-affected West African countries has reached 6,583.

The Ebola outbreak teaches us one very imperative lesson. It is impossible to predict such, shall we say, 'Black Swan' events. All you can do is be prepared and take appropriate preventive action in case of such an eventuality. Your best bet against such a deadly virus would be:
  • To keep away from infected people and regions
  • To build strong immunity and lifestyle habits to avoid infection
  • To take early supportive care in case of infection
Why are we discussing diseases and viruses in an e-letter dedicated to exploration of ideas on investing? When we read about the kind of crisis and disaster the Ebola virus has caused, we thought there were some very compelling analogies that fit perfectly in the investing context.

At a time when there is a general sense of optimism in the market, people may tend to ignore the pathogens in the business environment, the risks associated with investing in companies with thin moats and weak fundamentals. When trouble strikes, such businesses are the first ones to be doomed. Our nearly two decades of experience in the equity markets says that it is almost impossible to predict when crisis will strike. But you can certainly take preventive measures to make sure your portfolio has high resilience against any adverse turn of events...
  • Keep away from businesses that have inherently bad economics and no competitive advantage.
  • Be disciplined with your investing approach. Do not indulge in speculative bets. Do not overpay. Do not put all your eggs in one basket.
  • If the fundamentals of the stock that you have invested in deteriorate, it is always better to exit in time.
  • Always keep aside some amount of cash. In case of a market crash, it will provide you with some cushion and the opportunity to scoop up good stocks at bargain prices.
What steps are you taking to make sure your portfolio does not afflicted by an Ebola-like crisis? Let us know your comments or share your views in the Equitymaster Club.

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 Chart of the day
Few days back, we had shared our views about the increasing pressure on Mr. Rajan to cut interest rates as the broad macro economic data suggested lower inflation. The rant for rate hike only went up as recent data on index of industrial production (IIP) suggested worst performance in three years. However, taking a call based on the same might be short sighted decision. As an article in Economic Times suggests, the situation may not be as bad as it is made out to be. At least bank credit growth numbers do suggest that we may be on the right path.

As per an article in Economic Times, the macro economic data suggests an increase in the bank credit by 11.3% year on year (YoY) at the end of the November. Further, the projects are taking off at the fastest pace in 3 years. The commercial real estate seems to be a key beneficiary with around 15.2% growth in loans. As per the industry executives, the growth in the credit offtake has been on account of project execution with policies turning in favor. As a major change in this regard is yet to happen, we believe that interest rate cut alone will not be a panacea for all that is wrong in the economy. Infact, a premature rate cut unaccompanied by supporting economic scenario and policy reforms can even lead to asset bubbles thus nipping the economic recovery in its bud. We hope the concerned policy makers and authorities will keep the long term objectives of economic stability and growth in mind instead of turning to quick fix measures that may do more harm than good.

Will the credit offtake trend ease pressure to cut rates?

With the rise of a Modi Government, sentiments about economy have taken a U turn. One of the areas where one can sense this optimism is exports. What drives this view is the likelihood of better business conditions and benefits from 'Make in India' drive. But while that will take long to get implemented and reflected, the reasons to remain skeptical are quite palpable.

As suggested in an article in DNA, the revival of exports is not just a function of what happens inside Indian economy. The demand for Indian exports will be depend on how global economy fares. And the situation on that front can best be called fragile. The key exports markets including European Union, Japan, Russia and Middle East, which account for more than one fifths of the total Indian exports, do not offer a very bright economic picture. With oil prices on a free fall, oil exporting countries are likely to witness low incomes that will further translate into slow down in the economy and low demand for Indian exports. Hence, investors would do well to keep these risks in mind while betting on an economic revival and expected beneficiaries.

Now shifting from global concerns to the deep rooted issues in the Indian economy, we have come across a concerning trend. As the noose is getting tightened on black money and its perpetrators, new ways seem to be getting worked out in order to keep the parallel economy thriving. While it may take some time to identify and disclose the culprits in this regard, by the time this stage comes, it is likely that the black money would have made its way back to India in the form of yellow metal. What else could explain the huge surge in gold shipments from Switzerland to India? One must note that Switzerland alone is now accounting for 60% to 70% gold entering in India in recent months.

There is a high likelihood that this is just a way of routing back the unaccounted wealth. The trend is bothering and has caught the eye of authorities. As such, more vigilance by the Customs Department has been suggested to control misvoicing and limiting the black money transactions. While India seems to have woken up to the menace of black money, the reaction can hardly be called swift. By the time the Government gets ready to take action, the wrong doers are likely to have cleaned their accounts with little evidence against them.

Meanwhile, Indian stock markets continued to trade below the dotted line during the post noon trading session. At the time of writing, the benchmark BSE-Sensex was down by 31 points (-0.1%). Barring banking, all sectoral indices were trading in the red with the stocks from the consumer durables and realty spaces leading the losses. The Asian equity markets were trading mainly in the red with Japan and Malaysia leading the losses. Majority of the European markets opened on a positive note.

 Today's investing mantra
"Risk comes from not knowing what you're doing." - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Richa Agarwal and Ankit Shah.

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1 Responses to "What if your portfolio gets infected by Ebola?"


Dec 15, 2014

You got it correct...what if India is affected by Ebola...that is something worrying me for sometime.

Though personal and family protection comes first, need to see the impact on the portfolio.

Immediate contrast will be what did Buffet do when the world war was going on.

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