Rise of investment amid second wave of COVID-19 pandemic

The second wave of COVID-19 is different from the first wave. There was a lot of uncertainty last year, but now, everybody has personally experienced the pandemic and the lockdown, and its impact on health, family, friends, jobs, and businesses at least once.

Painful and discomforting experiences are generally good teachers and provide lifelong lessons.

What have investors learnt from the pandemic that we are seeing a surge in investments in the midst of the second wave?

There is a broader sense of continuity that the world will continue to function and a brief understanding of which sectors will get impacted in what way.

As long as investors believe they are not playing in the dark but can predict the end outcome with an acceptable certainty, they will continue to form their own hypothesis and back it up with capital.

We also witnessed huge stock market gains based on the hopes of vaccine driven economic recovery last year. Zerodha added double the number of customers than pre-COVID-19 days in India. In the US, JMP estimates the brokerage industry added more than 10 million new accounts in 2020, with Robinhood alone likely representing about 6 million. Interestingly, a lot of these were new cohorts of investors, many of them young and new to investing.

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Why now?

The honest answer is that it was already in the making and the lockdown allows people (retail/individual investors) downtime to do more research, reflect, corroborate, form their hypothesis, engage, and search on platforms that allow access to investment opportunities around their hypothesis/investment memo.

In 2020, 11 startups attained unicorn status and 12 more joined the unicorn club in 2021 with the expectation that more will join during the rest of the year. For angel investors and micro VCs, this is a huge confidence booster because they generally tend to get an exit by Series B or C. 

SPACs have spawned hope for mature companies with a technology play and big institutional VCs or investors as a possible exit route even though there are regulatory concerns. If ReNew Power, India’s biggest renewable power producer, successfully completes the SPAC transaction, it would inspire huge investor confidence in the entire ecosystem.

Stock/equity markets believe that lockdowns will be for a shorter duration, COVID-19 cases will peak in about two months time, most industrial and agriculture output will continue steadily supported by uninterrupted logistics, annual demand suffering by 0.5 percent on an annual growth expectation of around 12.5 percent, and the government is unlikely to take extreme measures to announce complete lockdown.

A lockdown of a fortnight is less than four percent of the year, and instead of giving in to fear and uncertainty, most investors do not want last year’s episode to play again where their losses became someone else’s gain.

Types of investors and their workings

There are two types of Investors, those who manage their own money (retail/individual investors) and those who manage the money of others for a fee and performance bonus (institutional investors). Fundamentally, the success metric for both is a return on investment over a certain time period ‘T’.

By definition, investors who manage their own money have more skin in the game, are quick and flexible to respond. but can get impulsive and are generally restricted by resources, and opportunities available to them. Institutional investors, on the other hand, have their reputation at stake, have resources to look at opportunities throughout the year, and be more thorough but have a fiduciary duty to their Limited Partners (LPs) and are restricted by the fund mandate.

As such, in a lot of cases, retail investors end up following lagging indicators and in most likelihood, these indicators are created by institutional investors but it is all at some level connected in a loop and feeds into each other.

What happens next?

It is humbling and inspiring to see how our nation is coming together to help each other in these moments of extreme distress. Even if the investor sentiment is upbeat, it goes without saying that market demand, supply and sentiment is us together as humanity.

Companies and businesses are run by people and families and friends of most people seem to be impacted in some way or the other. There will be a slowdown in economic growth at least momentarily for sure but if you as an investor have a strong understanding or insight into certain sectors and how it will play out then go ahead and own the risk and reward.