In today's newsletter, we talk about the migration of funds from stocks to safe havens.


The Story

Here’s the deal. Covid — 19 aka Coronavirus is wreaking havoc everywhere. Italy, 241 cases, 12 dead. South Korea 1261 cases, 12 dead. Iran 139 cases, 19 dead. China 78,064 cases, 2765 dead. And with infection rates soaring, investors are trying to insulate their portfolios by moving money into what we call “Safe havens” — financial instruments that offer you consistent returns irrespective of what’s happening on the outside.

For instance, the most popular investment vehicle — stocks, have looked extremely suspect in recent times. In the past week, the US Markets have tumbled, the European markets have tumbled. Even the Indian markets are looking tentative. And this is to be expected because people buy into equities in anticipation of the future. When you buy Walmart’s stock you’re thinking of all the people that will visit the thousands of Walmart stores next year. You’re thinking of all the money they’ll pull selling beanbags, popsicles, and watermelons. You’re thinking of growth, profits, and dividends and you’re hoping that the future will be kind to them and in turn, you.

But when optimism gives way to caution, you wouldn’t like to stay invested in the stock, would you now? So, when people aren’t sure if coronavirus will impact sales going forward, they’ll look for alternatives. They’ll want to park their money somewhere else. And while it would make sense for most people to look outwards, you might want to look inward as well i.e. bet on stocks that will likely benefit from the pandemic, perhaps? Now although this proposition might look a bit dodgy, there is some merit here. Here’s a snippet from one of our earlier stories to drive home this point.

Now if you are not already aware, we don’t have a vaccine for this new virus. What we do have is a preventive care procedure. And most people seem to believe that face masks offer that extra bit of protection the virus demands. And that little thesis has turned the fortune of a select few companies.
For instance, shares of Japan’s Kawamoto Corp., which produces masks and other medical products, has quadrupled since the start of the year.

Unfortunately, the blade of uncertainty cuts both ways. If you don’t know how long the pandemic will last, you can’t know for sure if medical equipment manufacturers will continue to thrive. And what if vaccines show up in the next few months and you are betting on this thing to last at least another year. That wouldn’t help you a lot.

So you need something better, and what's better than government bonds? Not just any government bonds, US government bonds. If you are thinking of lending money to “Uncle Sam” (US Government), you’re probably lending to the most creditworthy institution in the world. Because governments hardly ever default. And the likelihood of the US government defaulting on its repayment obligations is almost negligible. If you are in India, you could do with Indian government bonds as well. And truth be told since Coronavirus is now approaching pandemic status, money has been pouring into treasuries like crazy.

Outside of government bonds, there’s another popular avenue — Gold. That beautiful yellow metal. A universally accepted store of value. Always in demand. If you don’t fancy it as an investment, just flip it around and sport a swanky new chain. It’s got everything going for it. And in the past 15 years, Gold has returned a whopping 278%. So all in all, a pretty safe bet during testing times. Unfortunately, if you tally up returns for the past 30 years, gold has only appreciated by about 280%. Meaning there’s almost no difference between 15-year returns and 30-year returns. So if you are looking to park all your money in gold for a long time, maybe think again.

Then, there is the last gambit. Just move all your assets into countries where the likelihood of infection remains slim. You could put your money anywhere you like. Real Estate, Gold, Bonds, Stocks, anything you fancy. So long as you know that the country provides a nice little reprieve from all this coronavirus stuff. In fact, of the countries most at risk of importing coronavirus cases, India ranked 17th earlier this month. So some people were hoping India would turn out to be that destination. But unfortunately, this doesn’t sound like a very convincing argument because if we do have a breakout in India, you and I both know, all hell will break loose.

Until then, we keep searching...

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