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Ashwath Damodaran on Covid Crucible: Three Act in a Play


Ashwath Damodaran had already decided not to make the Kovid-1 crisis like the previous market push.

As the epidemic spread, he could see how it was evolving and realized that it was at the same stage as the previous financial ups and downs on investors.

“At first you lose sight. Why? Because in the midst of chaos, things are melting,” he explained in his virtual presentation for the CFA Institute on November 10, 2020, in “Crisis as Crucible.” [the valuation tools] Which you think is important. . . . And the third thing is that you outsource your thinking.

Damodaran felt the process like everyone else, but he decided that this time he would work differently and keep a record of his thoughts and impressions in real time.

Why? Because insight is always 20-20: “It’s impossible to put out what you know,” Damodran said. “So you write about the 2008 crisis in 2010. You know how it unfolded. You know the end. So you can behave exactly as you knew from the beginning.”

But with Covid-1, he decided not to fall into that trap.

So on February 2, 2020, he wrote the first post of his epidemic-centric series. About two weeks after the actual global effects of the coronavirus began to come into focus. His post reflects the confusion that everyone has experienced and highlights how much we still don’t know about coronavirus.

And over the next eight months, he recorded his evolving perspective on the crisis, writing the 14th and final entry in the series in early November.

He looked at the accounts of that tumultuous month and came to a conclusion:

He said it is a drama of three plays. “Melting, melting, reconsidering.”



Act I: Meltdown

The stock has entered 2020 with considerable momentum.

“What they brought was a complete steam head,” Damodaran said. “2019 has been a great year for stocks. U.S. equities have risen nearly 30%.

And for the first six weeks of 2020, they continue to grow and reach all-time highs. But then, on 14 February, the Italian government announced that it had found 200 COVID-19 cases that could not be found on cruise ships or in Asia. It was clear that the epidemic was out of control and had gone worldwide.

“So we woke up to the crisis,” Damodaran said. “And for the next five weeks, remember what happened? We had a recession.”

Lockdown was introduced, schools and borders were closed and much of the world economy came to a standstill. Both the S&P 500 and the NASDAQ are down 30% or more. And it wasn’t just the US market. Equity indicators around the world have gone unnoticed.

“March 20, the darkest day, they were all down,” he said. “There wasn’t even an index that wasn’t affected.”

The sinking of equities triggered a flight to security and the U.S. Treasury.

“Across the board, Treasury yields have declined,” Damodaran said. “Thirty-year, 20-year, 10-year T-bills have all dropped in the first five weeks.”

The US Federal Reserve entered and announced on March 15 that it would resume quantitative easing (QI). But that was not enough.

“The market cried and said, ‘Who cares?’ Damodaran said. “It simply came to our notice then. In fact, March 2nd, if you look at the news, it was the Day of Judgment. People said, sell your stock, go to the mountains, the end is coming. ”

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Act II: The Melt-Up

But then, as markets prepared to sink into another global financial crisis (GFC) or Great Depression, they suddenly came to a standstill.

What happened? On March 23, the Fed took a more important step by pledging to act as a security fence in the private nding market.

“You know what they meant, didn’t they?” He asked. “They will pay the troubled company, buy low-rated corporate bonds. And for better or worse, it looks like the crisis will turn around.

Private investors started offering loans and the markets stopped their downward growth.

“Anyway, we woke up on March 2nd, and everything seems to be clear,” Damodaran said.

And in the months that followed, equity markets did not recover everything they had lost, they reached new heights.

“By Sept. 1, the stocks were up to where they were on Feb. 14,” he said. “The crisis was in the rearview mirror.”

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Act III: The Recalibration

Over the next two months, the markets wanted to strike a balance.

“Between September 1 and November 1, there was a renewal,” Damodaran said. “We had good days and bad days, but the market was trying to find a stable state.”

So how has the crisis reshaped the markets in these eight months?

The worst performing industrial economy was the United Kingdom, which had to give Brexit weather at the peak of the epidemic. The worst performing regions were Russia, Eastern Europe, Africa and Latin America.

Why these four? Due to their reliance on natural resources and heavy infrastructure companies, which were unevenly affected by the economic downturn.

Damodaran also identified the sectors most affected by the epidemic as of November 1. Based on its analysis of S&P global companies, based on consumer considerations, technology, and healthcare came out well, while energy, real estate, and utilities went bad, with them falling financially.

“In most crises, young companies suffer at the expense of older companies, while risky companies suffer more than risky companies,” Damodaran said. “This crisis seems to have overturned the script.”

The only exception to this rule was debt: high-debt companies have done worse than their low-debt counterparts. But otherwise, high growth loses low growth, non-dividend loses high-dividend and high P / E can lose low P / E.

In fact, the main story of the equity market in those eight months was the re-determination of risk-averse companies.

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Postscript: Text

So what was different about this crisis? For one thing, markets usually melt first and the larger economy brings with them. In this case, it was almost the other way around.

“Sequencing was off,” Damodaran said. “And it came with a timer. The timer, of course, was a complete lie: that in six months we would all be back to normal.

Another difference was the role of Venture Capital (VC). The VC sits on the sidelines in financial panic, as initial public offerings (IPOs) are postponed. But venture capitalists never left the field.

“They were in play all the way.” Damodaran said. “In fact, the third quarter of 2020 was the all-time high for IPO numbers.”

And the investor class has gone through some changes during the epidemic. Large portfolio managers in Boston, New York and London have reduced their roles.

“The structure of investors has changed,” Damodaran said. “It’s a market run by investors where portfolio managers have to track the public. They hate it. They like to call shots but they no longer control the game.

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Still, the larger story of the eight-month period between February 1 and November 1 is that the epidemic affects risky companies, most notably six: Facebook, Amazon, Apple, Netflix, Google and Microsoft.

“These six companies have grown by about .3 1.3 trillion,” he said.

During the same period, all other U.S. equities were below 1.3 trillion.

“Do you know why US equity is back?” Damodaran asked. “Because of these six companies. You bring these six companies out of the mix, all upwards all disappear. The stronger is the stronger. “

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All posts are the author’s opinion. As such, they should not be construed as investment advice, or the opinions expressed do not necessarily reflect the views of the CFA Institute or the author’s employer.


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Paul McCaffrey

Its editor is Paul McCaffrey Entrepreneurial investors At the CFA Institute. Previously, he served as editor at the HW Wilson Company. His writings have been published Financial planning And Daily Finance, Among other publications. He holds a BA in English from Vassar College and an MA in Journalism from the City University of New York (CUNY) Graduate School of Journalism.



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