Can India's Mega Vaccination Drive Start the Next Bull Market?

Mar 15, 2021

Editor's note: Tomorrow, our smallcap guru, Richa Agarwal will be live online at the Smallcap Fortunes Summit. To find out the best smallcap stocks to buy in the market today, join Richa by signing up for this free summit here.

Rahul Shah, Editor, Profit Hunter

The other day I was chatting with a close friend, an architect from Bengaluru.

Designing houses is not his only source of income though. He has a few other businesses on the side.

A couple of years back, he bought an entire floor on rent, refurbished the place and turned it into a shared workspace for those wanting to take a cubicle on rent.

The first few months were good. The business flourished.

And then the pandemic struck.

People started staying away for fear of contracting the virus. The venture that was once a great cash cow, now turned into a big liability.

Whatever little profits he made before the pandemic, have all gone into funding the losses he has been incurring month after month.

He is finally seeing some ray of hope though. The past few weeks have seen people return in good numbers.

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And if the current vaccination drive is anything to go by, he believes it won't be long before his cash registers start ringing again.

I am sure millions of people who have seen their businesses struggle the past few months, are harbouring similar thoughts.

They see the current mega vaccination drive as the silver bullet that will restore normalcy and pull us out of these dark times.

However, if global ratings agency Moody's is to be believed, we seem to be jumping the gun on this.

The agency has asked us to stop the optimism in its tracks. The uncertainty over virus mutations and the slow progress of the vaccination drives, remain the biggest risk to a global economic recovery.

Future GDP growth will depend on how countries manage their vaccination programmes and other measures.

The long term economic impact will come from how many jobs are lost before activity can resume across different sectors.

Thus, rather than eliminating the virus, countries will have to learn to live with it at low case rates.

I think Moody's is bang on in terms of asking us to exercise caution. Although we now know a lot more about the virus and the ways to deal with it, there could still be nasty surprises along the way.

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A different strain or a mutation may prove to be a tough nut to crack. It could force authorities to adopt serious measures.

There could also emerge pockets of localised outbreaks on account of the slow pace of vaccination.

All of these pose a big risk in terms of putting the spanner in the wheels of an already fragile recovery.

Thus, if you are an entrepreneur, you need to keep your costs to a minimum, conserve cash, and not take on any significant debt.

But what about an investor? Should he continue buying stocks or wait for some time for a clear picture to emerge?

If he is confident of the long term growth in the economy, his decision should be based more on how optimistic or pessimistic Mr Market seems to be at the current juncture.

It should not be based on how the near term economic recovery will play out.

Well, if valuations are anything to go by, Mr Market seems to be highly optimistic.

The valuations are not cheap by any stretch of imagination. The market seems to be factoring in a strong recovery in the near term.

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I have for quite some time now believed that in investing, what really moves the needle of performance is striking the right balance between offense and defense.

I believed that even though economic uncertainty was huge back in March 2020, it was a good time to play offense.

This is because the valuations were so low, they were already factoring in the worst. Thus, while the downside was limited, the upside was huge.

This is precisely what happened. We had one of the biggest and the fastest bull markets in recent times.

Right now though, it may be a good time to play defense.

The stock valuations seem to be factoring in a swift economic recovery. Thus, even if it materialises, the stock market may not move much.

This is because most of the near term upside is already factored in. However, a big negative development could cause stock prices to crash again.

Therefore, I think it's not a bad idea at all to hold a large amount of cash and be only partially invested in stocks.

At least that's what I have been recommending my subscribers of late.

What do you think?

Good Investing,

Rahul Shah
Rahul Shah
Editor, Profit Hunter
Equitymaster Agora Research Private Limited (Research Analyst)

PS: Tomorrow, our smallcap guru, Richa Agarwal will be live online at the Smallcap Fortunes Summit. To find out the best smallcap stocks to buy in the market today, join Richa by signing up for this free summit here.

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