The Pledge, The Turn, The Prestige: Exposing Mr. Market’s relationship with Coronavirus

“Now you’re looking for the secret, but you won’t find it, because of course you’re not really looking. You don’t really want to know. You want to be fooled.”
― Christopher Priest, The Prestige

The pledge

The past week witnessed a steep fall in global capital markets. The steep decline in capital markets are reminiscent of the charts in 2009.

Sure, drawing a parallel with 2008-09 makes us all the more jittery but then, we have reached 2019-20 when all global economies were predicted to crash & burn in ’09 – over a decade of not just proving the fearmongers wrong, but moving ahead to be a decade of wealth creation for investors globally.

Here’s how Indian capital markets braved pandemics in the past:

It is important to understand that while media headlines sensationalise the decline in stock markets by indicating resemblance to the sub-prime crisis era, there is one major fallacy in this hypothesis. The sub-prime crisis was structural in nature & was led by a fractured state of economy; however, the crisis today is led by reasons more biological than economic- or, is it?

It is common sense that China, the epicentre of the Coronavirus pandemic, is among the world’s largest manufacturer & supplier and hence, any social or biological disruption in the state will have an adverse impact on global supply of various goods and services. But, is this all that has caused such an upheaval in Indian markets?

Significantly, yes. Meaningfully, not.

Historically, global investors tend to pull money out of capital markets whenever a disruption of trade & commercial activities seem to be on the horizon and wait for the “dust to settle”.

Bulk of the global investors are institutional investors with a mandate to deliver optimal returns by minimising downside and hence do not try to play the recovery game to chase super-alpha. Now is a similar time where the fear is of nothing more than increased uncertainty – albeit short-lived.

India simply happens to be among global investors’ top investment destinations and had pumped in significant amounts of money to participate in the Indian growth story. But, it happens so that an event such as the coronavirus outbreak has led to investors pulling out money not as much out of fear but rather in search of a safer harbour.

The Turn

This has happened globally and in fact, India has stood quite resilient in the face of such a pandemic and was perhaps the least affected capital market.

Abs. Returns: Major Global Indices

Even here, bellwether indices in India reflects overall jitteriness by foreign investors and not necessarily a negative outlook on the Indian economy. This can be observed from the correlation between participation of foreign investors across market-caps and change in foreign investments and consequent impact on returns across market-cap funds.

India is undeterred in its faith, for a good reason.

The Prestige

Here’s another spin to the developing story.

Here’s India’s trade relationship with China in easy-to-understand donuts:

A keen eye would notice that China accounts for a meaningful 18% (second-largest) in India’s total import bill and a disruption in Chinese supply will definitely make it difficult for India to buy goods from China.

Now, is it good that India won’t buy from China or is it detrimental to India? Let me leave this open to let your perspectives run wild.

More importantly, China accounts for only 9% of India’s total exports which means that if China does not buy from India, 9% of India’s export revenues are at risk.

But, what are the chances that China does not buy from India?

Is it true that when the Chinese can not manufacture, the next best bet to fill the manufacturing gap is India? And if so; is there, in fact, a chance that China will end up buying more from India since it does not have enough manufacturing to suffice domestic demand and buying from India is the next best (feasible & viable) alternative?

Let’s talk about economic effects of this on India for a bit.

A recent MVIRDC WTC report has identified 20 products which constitute around 17% of India’s total exports to China in 2018 and the India’s export potential to China for these goods stand at USD 82 billion.

For context, India’s trade deficit with China was USD 53.6 billion in 2018-19. So clearly, India has an opportunity to reduce its trade deficit with China and the current situation creates a strong case for China to rely on India for imports of goods even beyond the scope of these 20 products, hence offering India an opportunity to reduce its trade deficit with China.

At the same time, the beautiful coincidence of escalated US-China trade tensions, China’s current inability to manufacture and hence export along with US replacing China as India’s top trading partner and India’s resilience during the synchronised global slowdown improves India’s prospects in being the go-to import source to fulfil global demands – heavy duty economic recovery demand.


The Department of Commerce has identified 203 product lines where exports to the U.S. (globally, the largest importer) could be increased by replacing Chinese exports backed by India’s market access & ability to do so.


What happens next is anyone’s guess. But if you take a closer look at facts, trust history and believe that the world is not coming to an end (like many thought in ’08); then you know what’s the best course of action for you.

Key Takeaways for Investors:

Capitalise on the opportunities (dips) to buy into funds with high quality portfolios and hang in there for till the storm comes to a lull – that’s when the others will scramble to accumulate while you see the value of your possessions rise.

(Parallel concept inspired from the ’08 Christopher Nolan classic – The Prestige)

“An illusion has three stages.

“First there is the setup, in which the nature of what might be attempted at is hinted at, or suggested, or explained. The apparatus is seen. volunteers from the audience sometimes participate in preparation.” – The Pledge

“The performance is where the magician’s lifetime of practice, and his innate skill as a performer, co-join to produce the magical display.” – The Turn

“The third stage is sometimes called the effect, or the prestige, and this is the product of magic. If a rabbit is pulled from a hat, the rabbit, which apparently did not exist before the trick was performed, can be said to be the prestige of that trick.” – The Prestige

― Christopher Priest, The Prestige

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