An Eraser and Some Pencils

17 NOVEMBER 2020

On the first day of trading for Samvat 2076 on October 27, 2019 the BSE-30 Index gained 192 points to close at 39,250. Despite the shock of COVID in the early months of this calendar year 2020, the BSE-30 Index closed Samvat 2076 at 43,443 which was a gain of 4,193 point or 10.7% for the year. Not the best year of returns for the BSE-30 Index but, given the collapse in the global economy due to COVID was far worse than that experienced during the Lehman bankruptcy in 2008, this is a stellar performance.

Samvat 2077 has begun on a good note. With a further rise of 195 points in the Index to an all-time peak of 43,638 during the weekend mahurat trading session is the market signalling that good times are here to stay? With uncertainty over the pace of economic recovery in India, the outlook for interest rates and inflation and the stop-start fight against COVID, it is difficult to evaluate which asset class will do well in the near term.

But COVID - and the Lehman bankruptcy before that - has taught us to follow a version of the 24-80-20 asset allocation pattern more closely. Finding a sensible portfolio of assets to invest in for our long term needs is not a difficult proposition. But there are bigger issues that need to be dealt with.

The eraser...

The spread of the virus which originated from Wuhan, China has probably harmed every person on planet Earth. From the physical, mental and emotional damage to an individual, to the erosion of family support systems, to the decimation of economic activity - the corona virus has made much of 2020 a write-off. Ironically, 20/20 is the synonym for perfect vision and clarity. And what we have witnessed so far is the struggling efforts of many societies to understand, to analyse and to effectively deal with the full impact of the virus.

In 2019, while the world was busy spending USD 1.9 trillion on arms and ammunition to fight the visible human enemy, the invisible virion of SARS-Cov-2 with a size of about 100 nanometers (1/1000th the width of a strand of human hair was ready to, literally, blanket the world. Calculations by Yinon Bar-on from Israel and other scientists from California (published on the National Institute of Health website) suggest that - if we were to continue with our normal life and not be in any sort of lockdown - one infected person could infect 1 billion people in 3 months! As in investments, the virus has learnt the power of compounding. The authors of the study assumed an infection rate of R=4, which means that 1 person infects 4 people, and an incubation period of about 3 days. No human contact, no growth in cases infected.

In 2019 (according to the USA spending on arms and armies was USD 732 billion, China USD 261 billion, and India USD 71 billion. SIPRI noted that this "the first time that two Asian states have featured among the top three military spenders". Our militaries are either preparing to fight the wrong enemy - or some nations are developing new weapons of a biological kind.

The world has also achieved some more milestones since the collapse of Lehman brothers and the Great Financial Swindle pulled off by the financial firms: a focus on consumption and consumerism. The global economy is far more integrated today than it was when SARS hit (2003) or when H1N1 hit (2009/2010).

More people travelled on planes in 2019 than in 2010 and flew longer distances for business or vacations. A measure of RPK (revenue passenger kilometres = number of people who took a flight x the distance they flew) shows a 100% increase in RPKs over the past decade.

A virus which needs a human to act as a carrier can multiply its reach on the back of our open society. With an estimated 20% of all jobs in the developed and emerging world linked to travel and tourism (airlines, airports, local transportation, hotels restaurants, museum, theatre) the 98% decline in air travel in April 2020 and the lockdown of local activity had an immediate and disastrous impact on societies as unemployment soared.

Though we may have a vaccine in the next few months, we are unlikely to see a full economic recovery to our "normal" way of life until sometime in 2022. It will be a long haul.

In addition to the economic impact that we can measure and tabulate neatly, there is the immeasurable impact that COVID has had on our lives and on the lives of those around us.

From the emotional anguish of a lonely death where family members could not be with their loved ones at a cremation or a burial; to the disappointments of marriages being postponed; to the inability of new born children to meet their grandparents; to the suffering endured by those with other diseases that could not be treated during lockdowns - the stories of suffering are plentiful and painful. For all our taming of nature - or abuse of nature - our way of life was decimated by a miniscule virus.

To add to this virus-induced tragedy, our actions - or inactions - have added to the suffering and the pain of many. The images of migrant labour trudging home after being ignored for weeks by callous governments; the security guards and liftmen abandoned by residential and office societies with disdain and contempt; or the action of companies reducing workforce and headcount as they adjust the reality of their businesses to be in tune with the new environment where human interaction will be limited for many years (Quantum Mutual Fund is also guilty of this). The scars on society and its eventual impact on politics may be seen over the next few years. paint your picture...

Yes, we need the eraser to remove the pain of the past few months but - most importantly - we need a set of colour pencils and a blank sheet of paper to imagine the future. Every crisis is an opportunity and, yet, policy makers have failed to take the steps needed to reshape how companies interact with society.

After the Great Financial Swindle, policy makers implemented rules that made the larger financial firms larger. Rather than reduce the risk to the global economy, we have added to the risk by ensuring that the market share (and political influence) of the larger financial firms has increased. Opportunities for growth were rewarded to a few by a set of rules and regulations that, ironically, hurt small companies and gave largesse to the big. The big companies caused the problem but the small were punished by regulations. From banks to mutual funds to insurance: the market share of the larger firms has increased since 2008.

The governments of the US and Europe were in the process of examining the role of large technology companies before COVID hit. They were, presumably, trying to break up big tech and limit their economic clout - as was done for telecom giant ATT and for software giant Microsoft. Now, COVID has made the technology companies stronger.

The role that "big tech" and social media played in determining the elections in the USA in November 2020 - or in India in 2019 - will be scrutinised decades from now. In the meantime, the only government that seems to have the willingness to continue to fight the power of big-tech and big media is the European Union. Of all the coloured pencils we use to paint our future, the red pencil we use to deal with technology companies will be the most important.

But the pencil policy makers need to put to work is the required spend to support the lower rungs of a broken economic ladder. Halting and reversing inequality will determine the immediate stability of the social fabric, torn as it is. The varying shades of justice and freedom that blot our world will be linked to this economic rescue package. Different countries will deal with their challenges in different ways: some like China will continue with their social contract of providing comfort for many with freedom for none; India will bungle along noisily providing a little of both and pretending it has given a lot of both; the US has declined into a tinder box of race and economic insecurity; Europe, meanwhile, has experienced meltdowns over two world wars and it will stay with the ideals and try hard to avoid the pain while dealing with the dilemma of being an open society and hosting millions of immigrants.

In addition to dealing with the issues of our social contract with each other, we need to define our ask: what resources do we want from the planet without endangering the planet we live on? The World Bank called these the Sustainable Development Goals. The power brokers are positioning themselves to extract fees on the march to green-washing.

While a precise number is not possible, estimates suggest that the world needs to spend anywhere between USD 1.5 trillion to USD 5 trillion per year for the next 10 years to achieve a better life for many, and for the planet itself. It sounds like a lot. But when you compare this to the USD 2 trillion spent on the military every year, it is not an impossible task.

In the late 1960's a bunch of dreamers got together with a message of love, peace and flower power and anti-war protests at the height of the Cold War. This "love thy neighbour" movement culminated in the music festival of Woodstock in July 1969. Ravaged by war and the politics of war, the baby boomers protested for a better world.

Well, we are where we are at this point in time with more information, more education, more facts - but possibly less knowledge.

Given what we know today the challenge is to paint better - and brighter.

Start painting...or the policy makers will do it for you. And bungle again.

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 Savings 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, 10% in Q ESG and 75% in QEFOF 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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2 Responses to "An Eraser and Some Pencils"

Sambaran Mitra

Nov 18, 2020

I totally second the proposal of Eddie P Behramkamdin. I would greatly appreciate a compilation of Honest-Truth in a book format. In my friend-circle, I jokingly refer to Mr Ajit Dayal as my "socialist fund manager". I disagree with some of his views, agree with most AND trust my money with Quantum.
It would be great if the compilation is done in a hard-copy edition in coffee-table-book format. I would love thick pages, superb print quality, maybe some illustrations.

Like (3)

Eddie P. Behramkamdin.

Nov 17, 2020

Wonderful writeup by none other than Mr.Ajit Dayal who has kept alive his style of writing which is really to be appreciated as always. He has got precise thinking and grip on all subjects not only finance, economics and investments.
Equitymaster should atleast give honour to Mr. Ajit Dayal by publishing a book consisting of his invaluable writeups - "HONEST TRUTH" so that many can take advantage of same by a reference book on their book-shelf.
I am not a so good writer but strive to be a good reader of world famous authors and Mr. Ajit Dayal is no exception.
Best regards with God bless always for many such writeups to follow,
Eddie P. Behramkamdin.

Like (5)
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