Dear Investor,

Local and global events have resulted in the Nifty and small and mid-market cap indices fall by 18-20% over the last four weeks. This has resulted in a lot of the froth being removed from the market. The deep and swift correction in market has been global with markets everywhere reacting to the spreading panic and risk of Coronavirus (Covid-19). In India, we also had the event of Yes Bank moratorium. As a result of this restructuring, the government, RBI and private sector action seems to have averted a big systemic risk. While the task of bringing stability to the banking and financial system remains a work in progress, this action should alleviate depositors’ fears and hopefully pave the way for future action.

We will continue to monitor the economic fallout of the coronavirus pandemic closely. No doubt there will be disruptions to trade and supply chains that will cause demand as well as supply side issues. Economic activity and corporate growth & profitability will be impacted. The jury is still out on whether this impact is limited to a couple of months or will last longer than that. Some service-oriented businesses (airlines, hotels, malls, multiplexes etc) will likely see a deeper impact to near term profitability given they may not be able to make up for ‘lost time’. On the other hand, manufacturing businesses may be able to make up for some of the lost business once demand normalises over the medium term.

In the gloom and doom, as of mid-March, it seems that factories in China seem to be coming back on stream and production ramping up. If this ends up being the global template, it will imply that if the virus is contained and adequate steps are taken, normalcy could perhaps be restored within 3-4 months – while not strictly comparable, similar was the case even after the SARS pandemic in Asia in early 2003. Anecdotally, here in Mumbai and talking to friends in other parts of India, it seems that the public awareness regarding the virus is quite high and people are choosing to spend more time indoors and avoiding crowds. The government with its directives on visa cancellations, active monitoring at airports and closure of large public areas seems to be doing its part too. It will also be interesting to see how governments all over the world react to the economic turmoil. Will we see more direct measures by them to help pump-prime the economy along with the monetary easing policies like QE that they have adopted for the past decade?

At QRC, we were able to raise cash in the client portfolios ahead of the big market sell-off in March and as a result, portfolios are in much better shape than the market. We do not claim to have a crystal ball or any great insight on what and how much damage the pandemic could do. In our experience, market participants tend to over-react as a result of extreme greed or fear and all we can and will try to do is remain watchful and mindful of any overreaction and take advantage mispricing. It seems that headlines for the next few weeks will likely get worse before they get better. We continue to evaluate how each of our holdings will be impacted by the contagion and will take necessary action. However, we are of the strong opinion that once the panic recedes, the markets will look past the near-term earnings impact as long as no permanent damage is done.

At his 1933 inaugural address towards the end of the Great Depression, President Franklin D. Roosevelt famously said – “The Only Thing We Have to Fear Is Fear Itself”. This was a message to the American people that their fear was making matters worse for the economy. While this is not a ‘throw caution to the wind’ message from us, we will not shy away from making investing decisions that may be painful for the short term but result in much superior outcomes in the long term. It is during tough times that one can purchase high quality businesses at a good price. We will continue our search for the same.

Please do not hesitate to reach out to us if you have any questions or need any clarifications.

Stay safe.

Sincerely,

Team QRC