The Market Gets a Viral Attack

11 MARCH 2020

The news reports suggest we are in a Kal Yug.

And that is ironic: March 9, 2009 was when the US economy saw the first signs of green shoots after the bankruptcy of Lehman and the great bail out of the financial swindlers by the Bush and Obama administration. Contrary to popular perception, kal yug started then - not on March 9, 2020 when the world markets took a beating led by the price (and geopolitics) of oil.

The troubles of the world financial markets did not begin with the realisation of the fact that there is more debt in the planet than at any point in history; or the fact that central bankers have been so busy printing money that they have forgotten what it means to be a repository of faith in the financial system. The nakedness of the central bankers is so apparent that people have begun to believe in crypto-currencies which are, at best, bundles of digital code wrapped around hot air!

No, it did not take any of the known economic parameters to begin to deflate a ridiculous bubble: it took a virus, which is 1,000th the dimeter of a human hair and all of 0.000000004 metres in diameter to prick a hole in the falsehood that has been created since the bail out of the financial system in 2008.

The coronavirus has had more press than the assassination of President Kennedy, the break-up of the Beatles, the terrorist attacks of 9/11, the Lehman bankruptcy, and the split in the British royal family: combined! COVID-19, as it is called, has infected more people - and killed more people - than SARS, a similar virus did during its reign of terror from November 2002 to April 2003.

And because the world economy is more integrated than it was in 2003, with China claiming Super Power status to displace the USSR and stride toe-to-toe with USA, the impact on supply chains, consumption patterns and financial flows is more intense. To add to the suspense, some say that the virus was a biological weapon of mass murder that was accidentally leaked. Well, it has caused some damage.

Table 1: Meltdown?

Index Peak March 9, 2020 % change
BSE-30 Index 41,953 35,635 -15.1%
Dow Jones 29,551 23,851 -19.3%
MSCI All Country World Index 581 479 -17.6%
MSCI Emerging Market Free Index 1,147 948 -17.3%
Dollar Index 99.9 95.5 -4.4%
Oil, Brent USD per barrel 146 34 -76.7%
Source: Bloomberg

Oil, economy, and geopolitics.

The trigger for the market meltdown on March 9 was the fact that the Saudis set off a torpedo attack on oil - out of the blue!

Oil prices collapsed by 30% in Asian trading on March 9 as the Saudis decided to hit back at the Russians. The Russians, apparently, did not agree to a roll-back in oil production with a view to protecting oil prices as the Saudi-led OPEC cartel had suggested.

Generally speaking, lower oil prices are a good thing - when the economy is booming.

When consumption is high, lower oil prices suggest that the economic revival can carry on for some more time since there will be no inflationary pressure from this lower oil price. Lower inflationary pressures means that there is no need for a central bank to raise interest rates to fight inflation and slow the economy. The good times of economic expansion - and rising share prices - can continue.

But oil demand was already reduced by the coronavirus. Terrified by the bug, people flew less, drove less and stayed at home. That may be good for family life but it is not good for a debt-laden, consumption-fueled economy. The world economy was in a slowdown. The financial markets believe that the fight for market share between the Saudis and the Russians - and the collapse in oil prices - may suggest that the economy is a lot worse than people expect. And this is not likely to get better soon.

Instead of celebrating lower oil prices that may result in lower inflation and keep more money in the hands of consumers to spend on other things (besides petrol or heating oil), the market is focused on the other side of the equation: if the economy is in such a bad shape that the large suppliers of oil are cutting prices to grab limited volume, does this mean that business is really bad and that companies will have lower than expected profits? If profits are not growing, why are we paying these high prices for stocks? Hence, the sell-off in stock markets globally.

But, if you dive deeper, there may be other equations at play. The Russians and the Saudis both hate the fact that the US has taken away pricing power from them because of the increased production of petroleum from shale. Lower oil prices, below USD 40 per barrel, makes much of US shale oil production unprofitable. The US produces about 4 mn barrels per day of shale oil (out of a global production of approximately 90 million barrels of oil from all sources). If US shale was shut down, this would cause the traditional suppliers of petroleum (OPEC and the Russians) to regain more control of oil prices. Was this Saudi torpedo aimed at Russia or the US? Or at both?

But here is the complication: The US is an ally of the Saudis and, with oil prices so low, the US banking system could be hurt. Between 2016 and 2019, banks have helped raise or invest over USD 1.9 trillion in the energy sector in the US, of which the pipeline and fracking businesses received about US 700 billion as per an article in The Guardian. And then the local politics comes in: a lot of the oil producers are Republicans and are supporters of President Trump in this re-election year! Trump made his first visit as President to Saudi and is seen to be a supporter of Mohammed Bin Salman or MBS, the heir apparent to the Kingdom. It will be interesting to see how this plays out: look out for some tweets!

But the Saudis and the Russians are not friends! They have two problems: Syria and Iran. The Russians back the incumbent regime of President Assad in Syria and the Saudis want to displace him. Additionally, Russia backs Iran, a Shia state which the Saudis detest and see as an obstacle in their path to planting their Sunni form of Islam across the Middle East. The US, of course, does not like the Russians or the Iranians!

Closer to home in Saudi Arabia, MBS (the heir apparent to the throne) has placed many of his family members under arrest to establish his supremacy. His vision of a modern Saud kingdom resulted in the IPO of oil company Aramco in December 2019 to raise USD 29 billion at an IPO price of SAR 32 per share. The market price peaked at SAR 38 per share on Dec 19, 2019 and has now fallen to below its IPO price as of March 9, 2019 to SAR 28. The problem with this is that, reportedly, many local Saudis had bought the stock and were given loans to buy the stock. Declining share prices cannot be good for any government: whether a democracy, a theocracy, or a dictatorship.

While you watch the share prices and market indices, keep a keen look out on what happens to oil and the geopolitics of oil.

Is the meltdown over?

While the unravelling of the debt excess in the US and the developed world may have some more to play out, the question on an investor's mind in India is: Is the mayhem over and what should I do next?

To put things in perspective, it would be good to see how the market has behaved over the past few years, across various milestone events that shaped the political, economic, and financial landscape of India.

Table 2: Finding an entry point?

Event / date BSE MidCap BSE-30 Reliance HDFC Bank YES Bank Gold USD/INR
Modi wins, May 16 2014 7,766 24,122 540 401 109 1,294 58.78
Demonetisation, Nov 8, 2016 12,961 27,591 502 626 245 1,277 66.62
GST July 1, 2017 14,809 31,222 691 827 299 1,220 64.88
ILFS Default Aug 28, 2018 16,671 33,897 1,319 1,031 371 1,208 70.11
Balakot, Feb 26, 2018 14,318 33,974 1,231 1,053 230 1,326 71.14
Modi wins, May 23 2019 14,650 39,832 1,329 1,184 140 1,286 69.53
Peak (different dates) 18,247
Jan 2018
Jan 2020
Dec 2019
Dec 2019
Aug 2018
Mar 2020
May 2014
March 9, 2020 13,554 35,635 1,114 1,107 21 1,673 74.09
March 9 2020 v/s Peak -25.7% -16.1% -30.8% -15.0% -94.7% -0.1% -26.7%
Potential profit if back to peak +34.6% +17.7% +44.5% +17.6% +1,776 % +0.1% +21.1%
Source: Bloomberg, where date not available for a particular day, then next day is taken; Share prices in INR and Gold in USD per troy ounce;

On the face of it, there is some interesting Upside Potential, or potential profit, if you were to buy the specific stocks now and assume they get back to their past peak levels over, say, the next 2 to 3 years.

With the help of either some jaadu mantar or some good policy.

But there are some "bets" I would be very cautious about: Yes Bank, Reliance and the INR, for instance.

Over a 2 to 3 year period, a 34.6% gain in the mid cap indices could happen as could a 17.7% gain in the BSE 30 Index.

Your option is a "safe" bank deposit at 6% per annum - and a risk that your deposit is frozen.

Or a liquid fund with a 6% annual return.

To know what to do next, it is important to understand how markets - and some stocks - have behaved.

The inspirational win of Modi as PM in May 2014 laid the ground for a new set of economic policies and junked the Congress into its long-delayed oblivion. As can be seen from the +67% gain in the mid cap indices, the markets were running high on expectations and financials were doing well. Reliance was not - because Jio was not yet operational. The demonetisation blunder and the GST mis-step did not really dampen enthusiasm. Financial stocks were riding a consumption boom on the urban retail lending side and banks were growing and rolling over their exposure to real estate either directly or via NBFCs. So far, so good - the game of moving money around kept the music running.

The first default of IL&FS on its commercial paper on August 28, 2108 sent shockwaves into the market. The financial markets froze and now the stock market had to deal with a dead economy and a paranoid financial system where everyone was at risk of default. By the early months of 2019, there was concern that the BJP may not win a majority in the May 2019 election. The Nirav Modi scandal and the problems at ICICI Bank did not help.

Markets dislike economic inactivity and hate political uncertainty. The Pulwama terrorist attack and the Balakot response removed that political uncertainty and the BJP won with an even larger majority in the elections of May 2019. The fate of the Congress party was cemented.

But by then some sectors had peaked. The mid cap indices saw pain and lower growth rates for their segment of the market - the mid cap index had peaked by January 2018. The IL&FS bankruptcy added to the pain and companies like Yes Bank saw their share prices peak around that time. Fearful of what lay in the balance sheets of smaller companies and driven by this flight to quality, the BSE-30 Index saw a "concentration" in its performance. Between May 2014 and March 2020, over 66% of the gain in the BSE-30 Index has been due to 3 stocks: HDFC Bank (28% of the gain), Reliance (18% of the gain) and HDFC (18% of the gain). During that time period of nearly 6 years, 19 of the BSE 30 stocks in the Index made a gain while 11 lost value. That's not a broad market movement - that is more like a cartel or a mafia showing its dominance!

Reliance is interesting. Its stock hit a peak on December 19, 2019 when Aramco of Saudi Arabia had done the world's largest IPO. Aramco and Reliance had announced a deal in August 2019 whereby Aramco would buy a 20% stake in the oil and gas business of Reliance. This would generate approximately USD 15 billion in cash flow for Reliance and allow it to pay off some of its debt plus invest in the digital business. The deal was to close on March 31, 2020. It is unclear whether the Reliance stock is being hit by lower oil prices, lower oil demand - or the fear that the Aramco deal may be delayed leaving Reliance's balance sheet leveraged. This could reduce Reliance's ability to invest aggressively in the digital business. And, since Reliance has been a major driver of the Index in recent years, what happens to Reliance will impact the markets.

Some of the uncertainty that India will face, includes:

  1. A slowing economy within India due to the stress on the banking system and lack of job creation;
  2. A slowing global economy - though the price of oil may make India "rich" by maybe USD 30 billion from less expensive oil imports, the fact that economic activity is low suggests that tax collections from imports and profits from exports may also be low. Hence, saving money on oil imports may not necessarily be a big plus for India. We have a total trade value of USD 1 trillion with the world -lower oil will save is 5% of our USD 600 bn in imports which is good if oil remains at that level for the year and we can lock in future supply at these prices;
  3. Capital inflows may stall: as foreign investors review their risk allocations, they may decide to take some money off the table and sell out of India. On a US Dollar return basis, the Indian stock market has not had a stellar performance for the risks that a foreign investor takes on investing in India and away from their home country. Since May 2014, the returns by investing in the Quantum Long Term Equity Value Fund was 5.7% and the Quantum Equity Fund of Funds gave a return of 9.8% while the BSE-30 Index was 8.2% (all are per annum, annualized). When converted into US Dollar returns, the return of the BSE-30 Index works out to 3.8%. The Dow Jones 30 Index has given a return of 9.1% in US Dollars during this same time period. A slowing or reversal of capital flows is not good for markets and could also see a dent in the currency - offsetting some of the gain from lower oil prices;
  4. The unknown of the coronavirus: no one knows how long this will last and what the eventual end result is likely to be. Uncertainty is not good for markets. The belief that India will benefit as multinationals decide to diversify their risks away from China-based factories is true. But no one knows when - or by how much. For all we know, this virus may set off a desire to build more factories in the home country of the developed world multinationals and not to outsource. With newer technologies and robots, the decision of multinational companies may not be an automatic win for India.

So, should one add to the equity portfolio?

My views on demonetization and GST are known - and not liked by many!

I believe that both these steps hurt the Indian economy.

The BSE-30 Index was in the 27,000 to 31,000 range in that 2016/2017 period.

It is at 35,500 levels now, up by 15%.

Over the past 3 years, companies have added maybe 10% to 15% to their earnings, in aggregate.

In that sense the market is not expensive: I am paying 15% more to buy an Index that has shown earnings, in aggregate, 15% higher than what they were before demonetization.

But we don't buy stocks for the past earnings.

We buy it for the future expected earnings.

And this is the stumbling block - globally and locally there is no visibility on when the economy will recover and how companies will profit from it.

It may be a long wait.

In May 2014 we were optimistic about the ability of the BJP to bring in reforms that would kick start the Indian economy. Today, very few have the same belief in vikas as the economy languishes - even before the global crisis created by the coronavirus.

Nevertheless, despite the uncertainties of when we can see a rebound in the Indian economy, it may be good to allocate some money to equity - provided you had kept some money aside for doing so! Don't sacrifice your safe money for a chance to make returns on investments. That safe money remains your sacred pot, never to be invested in stock markets.

A few weeks ago, I had indicated that I was adding to my portfolio of Quantum Equity Mutual funds by moving money from the Quantum Liquid Fund. I continue to do that, in tranches. This is what I wrote last month:

Overall, I have been a little "defensive" in my asset allocation and have a lower exposure than I should have in the various Quantum equity mutual funds. For now about 15% of what I should have in other Quantum mutual funds is parked safely in Quantum Liquid Fund. As can be seen from my "target" I plan to switch about 15% of my investments from Quantum Liquid Fund to the Quantum Multi Asset Fund and the various Quantum equity funds - when I feel more comfortable with stock market valuations.

I am using this sell-off as an opportunity to invest more in equity funds. You need to understand your financial situation and risk-appetite better to decide what you should be doing. This is not a blind "buy on the dip and make money" story. It could be a long and bumpy journey.

Table 3: Moving money to equity, steadily

Allocation, as of Jan 31, 2020 % allocation My target
Bank deposits (not in FDs) 2% 2%
Quantum Liquid Fund 25% 5%
Quantum Multi Asset Fund 5% 10%
Total, Safer and Liquid 32% 17%
Quantum Equity Funds, various 47% 62%
Quantum Gold Fund / ETF 21% 21%
Total 100% 100%

Suggested allocation in Quantum Mutual Funds (after keeping safe money aside)

Quantum Long Term Equity Fund, Quantum Equity Fund of Funds, Quantum ESG India Fund Quantum Gold Fund
Quantum Liquid Fund
Why you
should own
An investment for the future and an opportunity to profit from the long term economic growth in India A hedge against a global financial crisis and an "insurance" for your portfolio Cash in hand for any emergency uses but should get better returns than a savings account in a bank
Suggested allocation 80% in total in both; Maybe 15% in QLTEF and 75% in QEFOF and 10% in Q ESG 20% Keep aside money to meet your expenses for 12 months to 3 years
Disclaimer: Past performance may or may not be sustained in the future. Mutual Fund investments are subject to market risks, fluctuation in NAV's and uncertainty of dividend distributions. Please read offer documents of the relevant schemes carefully before making any investments. Click here for the detailed risk factors and statutory information"
Disclaimer: The Honest Truth is authored by Ajit Dayal. Ajit is Founder of Quantum Advisors Pvt. Ltd. which is the Sponsor of Quantum Asset Management Company Pvt. Ltd – the Investment Manager of the Quantum Mutual Funds. Ajit is also the Founder of Quantum Information Services which owns Equitymaster and PersonalFN. The views mentioned herein are that of the author only and not of Quantum Advisors, Quantum AMC or Equitymaster. The information provided herein is compiled on the basis of publicly available information, internally developed data and other sources believed to be reliable by the author. The information is meant for general reading purpose only and is not meant to serve as a professional guide / investment advice for the readers. Readers are advised to seek independent professional advice and arrive at an informed investment decision before making any investment. Whilst no specific action has been suggested or offered based upon the information provided herein, due care has been taken to endeavour that the facts are correct, accurate and reasonable as on date. None of the Author, Quantum Advisors, Quantum AMC, Equitymaster, their Affiliates or Representative shall be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary losses or damages including lost profits arising in any way on account of any action taken basis the data / information / views provided in The Honest Truth.

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3 Responses to "The Market Gets a Viral Attack"


Apr 27, 2020

Dear Sir,

As usual, The Honest Truth is The Honest Truth. I just wish to add my little bit to your insights, with all humility.

British Prime Minister Benjamin Disraeli said: "There are three kinds of lies: lies, damned lies, and statistics." The automotive industry has gone beyond statistics to mis-represent the real world emissions - standards. NONE OF THE STANDARDS BENCHMARK THE EMISSION PER PASSENGER KILOMETER (EPPK). EPPK is conspicuously absent from the automotive standards of ALL developed countries. Furthermore, as per a 2018 report at, the present emissions standards permit as much as 50 % variation (earlier 9 %) in laboratory tests reports v/s on-road / real world emissions.

And on that, remember Volkswagen / Mercedes Benz Dieselgate, compounding the situation with defeat devices?

Some common sense school maths is adequate to understand the numbers relating Crony Capitalism, Corona, Cancer, Climate Change & high child mortality – and cars.

A person uses 0.75 cubic meters air per hour. A 1500 cubic centimetres (0.0015 cubic meters ) engine car running at average 3000 rpm uses 0.0015 X 3000 rev X 60 minutes = 270 cubic meters air per hour, on account of exhaust / tailpipe emissions. Additionally, as per research, non-exhaust emissions like tyre wear during braking / accelerating, clutch plate wear etc. (increases with increasing weight) account for 90% of PM10 and 85% of PM 2.5. It weighs 1500 kg & carries typically ONE passenger of at best 100 kg.

The above excludes car traffic congestion emissions (car transiting single lane roads to save fuel, causing congestion), infrastructure burden (cars use more road 'bandwidth' per passenger throughput per hour), more emission per kilometre traversed (cars rarely go beyond third gear in cities, resulting in more engine revs per kilometre traversed), cradle to grave emissions and life cycle emissions (e.g. 300 litres of water each time a car is cleaned, but 50 litres for a motorcycle).

Considering these factors, one can safely double the EPPK for cars.

A 150 cubic centimetres (0.00015 cubic meters) motor cycle running at 2000 rpm uses 0.00015 X 2000 rev X 60 minutes = 18 cubic meters air per hour (the RPM has been reduced as there is no AC) and carries typically ONE passenger.

In congested cities lacking ventilation due to tall buildings, where will these emissions dissipate? They remain airborne during day and coalesce during night when there is little / no traffic & temperatures drop, to be airborne again the next day when traffic resumes. Like carbon traps, these particles are virus traps. The particles enter homes through doors / windows and cannot be removed.

The contempt for commonsense (or is it a mala fide smoke screen) of the ‘scientific' community has even NASA blaming stubble burning in Punjab & chuli use as cause of Delhi pollution. And some ‘experts’ want even-odd for 2 wheelers also.

Now some ‘research’ findings and ‘expert’ opinions.

- In 2015, a study by The Lancet Commission stated that 18 lakh lives were lost due to air pollution in India. Even assuming that only 20 % of this is due to pollution in cities (the 80-20 principle), that is 3.6 lakh lives lost that year – more than the lives lost in the Hiroshima & Nagasaki atomic explosions combined IN INDIA ALONE.

How many jobs were created by the auto sector vis-a-vis lives lost?

- As per CNN news dt. 10.11.17, Berkeley Earth Science Research Group has estimated that every person in Delhi – man, woman & child – smokes 44 cigarettes equivalent per day due to pollution THEN. Present day data can be interpolated, at least linearly, in proportion.

- Research at Sir Gagaram Hospital in Delhi, as per ET article dt. 04.08.18, shows that 50 % of lung cancer patients are NON SMOKERS – well over 5 years after public smoking was banned. Ironically, numbers have increased.

- Research by Victor R.J.H. Timmers &, Peter A.J. Achten, amongst others, indicates that the PM 2.5 emissions are same for fossil fuel cars and electric cars. Though logically, electric cars will have more emissions due to their higher weight (a Tesla car uses 550 kg batteries – more than the weight of five passengers ! ).

- The latest Harvard research shows a link between PM 2.5 and Corona fatalities, which are higher in large cities having more car density e.g. New York, Mumbai (which have no power plants / steel mills / other high emission industries), but blames it on industrial pollution. Cars are conspicuously not mentioned.

- Even a modest USD 25 per ton emission proposed by Obama was shot down by Trump. So all cars have free pollution permit.

So much for chest problems, cancer & corona. Next - carona?



Apr 7, 2020

Truly said,, it started in 2009, or perhaps earlier. The governments have fuelled consumerism by reducing interest rates to enable companies grow their balance sheets. The climate changes / storms / forest fires, and now Corona, are but parts of forthcoming events. And now, governments are lying to the electorate.

Can you kindly review the below links:

A TV news channel in India briefly mentioned 3 lac Corona fatalities in China with news coverage of a live man being packed in a bodybag, but news was taken off the channel shorty thereafter.

No news channels have this news.

Has the government muzzled the Indian media, and the democracy, on behalf of Xi?


Ramesh B

Mar 11, 2020

dear, pl. write regularly. interesting read indeed.
particularly in such turbulent time, in details about indian n global economy.
thanks for your useful insights. pl.continue...
with best wishes

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