Finding financial sanity in the times of CoVID-19
At this point, we all know what COVID-19/ corona virus /SARS-CoV-2 is and how it has affected our daily routines and has forced us into quarantine, into a complete nationwide lock-down.
While the physical aspect of the lockdown is self-explanatory, its emotional aspect, however, is perpetuating from the fear of knowing too much; in the world of social-media, an hourly update on our phones about the number of new cases and deaths all across the world is creating havoc in our minds. And this fear, in turn, has caused a significant blow to our financial markets worldwide.
Since January 20th, the Indian market, effectively represented by SENSEX, has seen circa 40 per cent erosion of its net worth from its recent highs. DOW JONES, which represents the American market, has seen a decline of 32 per cent, FTSE from the UK has shown a 33 per cent decline while HANG SENG declined by 21 per cent. Globally it has been a red screen all throughout with no market left untouched by the impact of this virus.
This leads us to ask: how do we find sanity in the financial repercussions of this ongoing pandemic?
The key is to understand the historical evidences and correlate them to the current situation:
• Historically speaking, humankind have seen several economic & financial falls throughout our existence as a species, but we have recovered stronger and smarter each and every time. Be it the Great Depression, the World Wars, Black Monday or from this century, the dot –com bubble burst (commonly known as the 2008 financial crisis). This time around too, we will sail through the crises and emerge with newer lessons learnt.
• This too, shall pass, an age-old adage, is still helping us find our footing in unnerving times like these. Within this century only, we have seen the likes of H1N1-Swine Flu, which affected 1.4Bn people globally and killed over 300,000 people. This was soon followed by the Ebola epidemic with reported deaths of over 11,000 people. We have seen far worse situations with Asian Flu & Spanish Flu among many more, which although, have scarred us, yet, we stand tall and strong.
• The significance and the intensity of this financial fall is unparalleled and unseen, therefore it is being widely called a ‘Black Swan’ event. As highlighted above, the world faced similar events during the 2009 H1N1-Swine Flu, which had far-reaching consequences on human-life but, financial market did not even blink an eye to account for it. This time, the mortality rate is only 5% of the 2009 Swine Flu-associated deaths. However, we are seeing a far-reaching consequence today mainly based on 3 notions listed below:
1. First and foremost, technology has enabled us but has also burdened us. With the far outreaching capability and inter-connectivity we get from social media, it has created the perfect ground for both euphoria and panic to play rampage in. What we are witnessing across the world right now, is the latter taking over the former.
2. The second notion comes from the financial consideration that in 2009, global markets had seen a massive sell-off from Lehman financial crisis in 2008 and the valuation of stocks had corrected quite significantly (SENSEX corrected about 60 per cent from its 2007 highs). Therefore, there was no further room for financial distortions.
3. The euphoria of Exchange Traded Funds (ETFs) also created a significant valuation bubble. As fund managers failed to outperform the markets in recent times, most of the investors had switched over and started investing in these passive investment tools, which out-performed the market return in the short run. These tools, by their very nature, distorted the valuation as prices went up based on massive capital flows rather than on the fundamental analysis of each security. This could well be the reason why we saw a spike in PEs across the board.
The sanity, which we found among these observations, is quite intriguing. As we face this virus, we need to remember our past and be assured with self-belief that humanity will come out of it ever victorious and stronger. The cyclical effect of the financial market is always in play, as soon as the financial markets find value in themselves, we will see a seize in this fall and head towards the sky again. Most likely, this time around, the turn-around would be faster than anyone is anticipating. We may refer to it as a ‘Golden Goose’ event when it happens.