Is it mayhem?

Background

I boarded a flight on the night of 16th January 2020 from Singapore to Sydney. It had been close to a month I had stayed away from my little daughter & lovely wife. The excitement inside was too difficult to contain.

Within a couple of days into my holiday the news came from Wuhan that a certain Novel Coronavirus has struck from a wet market in Wuhan in the Hubei province of China. Number of people infected were rising exponentially. The faster growth was in the number of reddit members following that thread.

We enter February and the world has taken cognisance of this new virus. The disease gets a name Covid-19. Myself and my daughter both catch a fever. Flu? I am scared. I recover almost in a few days. Due to my daughter I postpone the return to Singapore. By that time Singapore becomes a global hotspot. The government which is perhaps the most efficient in the world comes into action.

I return to Singapore leaving my child and wife behind in the suburbs of Sydney.

And then shit hits the fan.

We witness the fastest global fall in index levels in a week since 1929! The Indian market goes from a high of 12K+ to a low in the mid 8000s in 45 trading sessions. We get the biggest fall of the decade. Vix shoots up to new highs since 2008. The world seems to be coming to an end - South Korea, cruise ships, Japan, Italy, Europe, US just get started. The politicians as usual are laid back but India has been very proactive trying to stop incoming passengers right from mid January.

Nifty 50 Fall

The Nifty has gone in to a bear market. From a peak of 12430 in mid January it has touched a low 8555 in the second week of March. That is a whopping 31% range. We are roughly at a 27% drawdown. High beta portfolios would have taken a beating. On one hand it looks we should be buying the dip and on the other its just the trailer to a long bear market and a recession.

The valuations have cooled off though.



On Friday the 13th the Nifty met with a lower circuit with some bluechip names hitting -20%.

Course of action

I have had the opportunity to hedge a portion of my portfolio in the early days of the fall but now my portfolio is completely exposed. With the added angle of YES Bank's moratorium this could be a deadly cocktail for the Indian markets.

Though my portfolio is taking a grand beating I have been deploying a very incremental amount into the top holdings. My assumption is that I will deploy 1% for every 2% of fall for the first ten percent drop. After that I will deploy 1% for every 1% of the fall for the next ten percent of the fall. That means 15% cash deployment. Post this I am still left with 25% of the cash I have built since January 2018. Before deployment I had 40%-50% cash. I have been cautious due to the overall valuation levels from end of 2017/early 2018.

So in summary 15% cash deployment for the next 20% drop. Meaning Nifty goes to 7900 levels. At 7900 levels I will be left with 25% cash. I am ready to deplete another 15% of this. I will not lower my cash position below 10% ever. From 12355 (max in Jan on closing basis) to 7900 is a 36% drop. To go down to 50% drop on a closing basis Nifty will have to be at 6200 levels. That is an additional drop of 20% from 7900 levels. So I will have the last 15% cash for a 20% drop. I will still deploy 1% for every 2% drop.

At the end of a 50% correction I should be left with 15% cash position. Just for reference in the 2008 crisis we were down roughly 50%. The last 5% I will keep till we see a reversal whether it is a 60% drop or a 70% drop.

I will be only adding a few companies as per my view. Listing them below. Most of them are from my core portfolio. Please note I am not a SEBI registered advisor.
  1. HDFC Bank
  2. Kotak Mahindra Bank
  3. HDFC AMC
  4. HDFC Life
  5. Asian Paints
  6. Pidilite
  7. Dmart
  8. Bajaj Finance
  9. Nestle
  10. Abbott
  11. Divis Lab

Where do we go from here

If anyone tells you that this is the bottom or we will see a 62.5% retracement from 12355 of Nifty then that is just a prediction. And I don't believe in predictions but probabilities. 

Listen and read everything available. Follow the global markets across all asset classes. Track data on the infected cases and how they are improving or deteriorating and so on. But always have a clear actionable plan in your mind, thats is the key to success.

All the best to your investment & trading.

Stay safe & wash your hands thoroughly as many times as possible.




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