Amidst Uncertainties: Looking Ahead And Back

A Review of 2020 and a Refocused 2021

Let’s look back to see how far we’ve reached in dealing with the Covid-19 virus since the uncertainties and troubles that global economy and the markets faced back in March 2020.

Virus strikes Health & Economy: Resurgent Fears

A year back, the world was struggling to battle the novel virus that emerged and took off rapidly with significant human and economic impact. Both the pandemic and the economic shocks it caused proved to be ‘Truly Global’ without any respect for borders.

The global economic activity was expected to decline on a scale we had not seen since the Great Depression. This was a ‘crisis like no other’ , therefore ‘the policy response too has been like no other’.

Governments all over the world have taken unprecedented action to fight the pandemic, to save lives and protect their economies as millions lost jobs. Additionally, fiscal measures worth trillions of dollars focused on healthcare & vaccination spending, infrastructure and boosting consumption to help a faster recovery. Even though efforts were on a global magnitude, China was the only major economy to have positive GDP growth of 2.3% in 2020.

Current State: As per IMF’s latest outlook on April 6 2021, India is expected to rebound fastest in FY22 with a growth of 12.5%, followed by China at 8.4% and the US at 6.5%. With the US and China having a combined 40% share in world GDP, the global economy is set to make a faster comeback. However, developing and less developed economies will be left in the dust as vaccines are just starting to be delivered. This could lead to a faster-growing economic gap.

New Wave remains the biggest risk: The world today is in the grip of a new wave aided by new variants which are spreading rapidly. Most European governments call for lockdowns while Indian states impose ‘lockdown-like’ restrictions.

“We expect a growth of 12.5% for India but very severe downside risks due to COVID wave” -IMF

Virus Uncertainty & Market Swings: A Roller-coaster ride & current state

‘Markets hate uncertainty, a commonly thrown around cliché, is fitting for the year 2020 — as virus uncertainty hit markets. With business activity shut, the world locked down, Oil & Global Equities collapsed, with the US S&P500 declining 34% in just a month — to lows of March 2020. The rush to park investment capital in safer havens in light of uncertain dynamics drove up Gold prices. Gold was up by 25% from March to August 2020 sitting at All-Time Highs of $2,000. Since then it has been witnessing volatility after economic indicators improved and Equities began to rally. Now, with the new wave of fears, gold seems is inching back up.

Strategy requires thought, tactics require observation.

Role of Central Banks: Based on lessons from historical recessions, Central banks globally introduced large (in some cases, unlimited) liquidity injections that flooded the system with cash and also brought down interest rates to record lows.

There was free money being made available and it had to go somewhere — towards Higher Risk Assets.

Equities: Stocks were almost bound to go up in that situation. From worst crash in a generation, equities rose to record highs due to stimulus measures and vaccine rollouts in November 2020. Global markets recovered from the lows of March and began to price in a return to economic normality in 2021. In terms of the US, the prospect of yet more stimulus measures was well followed up by Joe Biden. US Equities are still hitting record highs, while Lockdown worries have taken a beating on the Indian Rupee and Equities.

Events Extraordinaire & Excess Risk

DeFi: A lot of buzz & tweet has been going about on DeFi and we truly are seeing some swing action as the value of the global cryptocurrency market topped $2 trillion.

In just over two months, the market capitalization of the cryptocurrency market has doubled.

Bitcoin (BTC), the biggest digital coin with 50% of the entire crypto market cap has been a big driver along with Ethereum (ETH). Furthermore, Ethereum blockchain technology powers the non-fungible tokens, or NFTs — a recent rage.


It only gets more acronym cryptic!

IPOs/SPACs: Elements of indicative speculation — Speak the same tale!

IPO stocks are experiencing an exuberance, not seen in years. According to Dealogic, until March, around 300 US IPOs raised close to $100 bn. That is up 763% from the 35 IPOs valued at $11 billion for the same period in 2020. Similar, if not the same has been the story of Indian IPOs.

SPACs: Roughly 240 of global SPACs valued at nearly $76 billion, went public as of March 2021 compared with 13 SPACs that collecting roughly $3.9 bn in the same period last year.

The Fall of Archegos capital — A Love for Leverage Story!

A 57-year-old, South Korean-born — Bill Hwang had an investment fund (past tense as it no longer exists). The firm had $10–15 bn in assets and leveraged up more than 5X times across multiple prime brokers and came tumbling down in a ‘margin call’ leading to its blow up. True Story!

What blew up this multibillion-dollar investment firm in such short order?

The same situation that has blown up so many other overly aggressive investors:
Too much leverage (or excessive risk).

Amongst all of that, how does an investor act & invest?

“Anything can happen in the markets and you ought to conduct your affairs so that if the most extraordinary events happen, that you’re still around to play the next day“ — Warren Buffet.

Diversification across multiple asset classes — an old trick from the bag! seems to be the simple answer to the complicated question of how to invest keeping in mind constantly emerging uncertainties. Asset allocation is the main driver of performance in a portfolio rather than timing, selection or other factors. It helps to diversify the investment corpus across various asset classes. The benefit being that different pieces move in their respective trajectories — collectively it works to reduce the risk of the overall portfolio thus enhancing investment returns.

Also read:

o3 PMS newsletter for April 2021, in which our CIO EASundaram talks about how the above simple quote is effective in guiding one’s investment portfolio.