COVID-19 dominates markets and economies in March

The speed of the global spread of Corona pandemic took the world by surprise, along with high fatality rates. At this stage, there is significant fear across the world as to how long and deep the virus can spread.

World leaders, including India, have decisively acted to ‘flatten the curve’ of the spread and thereby reducing the load on a healthcare system which is not geared to handle a large scale spread of the virus. With some signs of stability in countries like China, Singapore, Japan, Thailand, etc, there does seem to be some hope of the rate of spread to diminish in the coming weeks.

Moreover, some experts believe the coming summer months might help along with a healthcare system which is better prepared than they were about two months back, with support from ‘social distancing’.

Lockdowns, though necessary, impact the economy

With a lockdown of most major developed economies globally, the second-order impact of the Coronavirus will have a severe impact on the economy. Factories, malls, offices, etc have been shut.

The impact of a few weeks of economic ‘halt’ needs to be addressed and one way of addressing this is for the various governments to infuse stimulus. We had seen a similar globally coordinated stimulus in 2009. This is in the form of an additional infusion of capital, forbearance on loans, directly supporting the weaker section of the economy, etc.

Though the lockdown is expected to last a few weeks, there is a fear of a longer-term lockdown – or a modified form of the same. If it continues for too long, the economic impact – in the form of unemployment, availability of products, corporate bankruptcies, etc – can be severe. It is our best-case assessment that the world will come out of the lockdown, once the ‘curve is flattened’ and the health care system is better geared to handle a further spread of the coronavirus.

The impact of a few weeks of economic ‘halt’ needs to be addressed and one way of addressing this is for the various governments to infuse stimulus. We had seen a similar globally coordinated stimulus in 2009. This is in the form of an additional infusion of capital, forbearance on loans, directly supporting the weaker section of the economy, etc.

This essentially ‘borrows from the future’ to support the present. In times of crisis, this is the right way forward. This should cushion the impact on banks, stock markets and bond markets in the short term – and thereby reducing unemployment and bankruptcies. A Force Majeure clause is being invoked by the regulators.

What does history show us?

In such times, it is important to go back in history and see the impact on stock markets in similar such events in the past. With the S&P 500 (the benchmark stock market index in the US) down 24% from the peak seen in Feb-20 and at its worst point the US index was down nearly 34%. Such falls are rare, even if we go back 100 years for the S&P 500.

The Nifty (the benchmark stock market Index in India) was down 29% from its recent peak in Feb-20 and at its worst point was down 37%. Such falls are rarely seen. These kinds of falls in the past have also been followed by a reversal over time. Much of this depends on how long it would take for the Coronavirus impact to be reined in and how well governments can cushion the economic impact.

Investors worried, but holding on is the best option now

With most investors sitting on stock market losses and concerned over their fixed-income investments (both the MF debt and in some cases the bank deposits also), there is worry over their investment portfolio.

On the other hand, note that many of the underlying companies in the portfolio have not only survived several such crises in the past but also thrived in the periods after the crisis passes. Typically bull markets start from the bottom of bear markets – just that in this case we are dealing with a sort of enemy which the world has not seen in recent times. The next few days will probably give us a better sense of the timelines, but till then we are hoping for the best.

Indices and benchmarks in March

Equity