How is COVID-19 impacting global financial markets

financial markets

With what was first reported as a flu outbreak in Wuhan city of Hubei province in China in late 2019, the coronavirus crisis is wreaking havoc worldwide and has brought the entire mankind to a standstill. Despite having a low mortality rate of circa 4 per cent (global average), this pandemic – as declared so by WHO – has shaken the entire world with its alarming contagion rate; exponentially spreading across over 190 countries in a short span of just four months, causing heavy casualties in several nations.

While the crisis has taken a mammoth toll on lives and livelihoods, economies around the world have just started to incur catastrophic collateral damages. Expected to be equally or much worse than the global financial crisis of 2008, ‘a global recession is imminent’ say the International Monetary Fund (IMF) and major Wall Street giants like Morgan Stanley and Goldman Sachs.

The coronavirus shockwave has hammered global stock markets resulting in abysmal valuations and multiples even for the bluest-of-the-blue-chip stocks across all industries. Since February 20 this year, global markets have shed about US $15 trillion of wealth; with every major stock index, on an average, suffering a cut of roughly 20 per cent to 30 per cent. The Dow Jones Industrial Average (DJIA) along with other prominent indices has witnessed multiple lower circuits during this time.

Largely influenced by foreign investments, key Indian indices like Nifty and SENSEX have also shed roughly 30 per cent in market cap after seeing two lower circuit halts in two weeks, wiping out over US$650 billion (INR 50 lakh crores) and closing as low as 13 per cent in a single trading session! Debuts in the secondary markets saw an evident plunge too. Fearing unwarranted declines in prices, upcoming public companies, like Burger King India, withdrew their Initial Public Offerings (IPOs). As for those who did complete the process like SBI Cards, saw listless listings.

Although there have been many instances of turmoil in financial markets, the 2020 bear market is unprecedented due to the sheer ferocity with which it has eroded years of growth in only about a month’s time.  

Another uniqueness of this carnage is that it has consequentially led to a liquidity crunch in the financial ecosystem due to the operational challenges faced by the market participants. Practicing ‘social distancing’ as the need of the hour, institutions are working on reduced staff and are facing acute shortages of human resources and labor to carry on the day-to-day activities, imperative for smooth functioning of both themselves and the markets. 

This can be seen from the fact that the mighty New York Stock Exchange opened without its trading floor for the first time in 228 years on March 23rd amid coronavirus fears after two people tested positive for Covid-19 on the trading floor, the preceding week. The fierce pace and extremity of correction has panicked investors leading to a loss of confidence in the markets that could not be revived despite multiple rate cuts by the US’ Federal Reserve.

The volatility indices are also at their all-time highs – with INDIA VIX going as high as up to 83.6 (up by more than 500 per cent from 13.7 as of February 20). Hence, concerns grew within the investor community regarding the prevailing market sentiments and expected governments’ actions. When no measures could bring a sense of respite, their patience levels imploded and to safeguard their investments, even the long-term value investors made a run to protect their capital from further fall by liquidating it into cash. Thus, they began selling their holdings incessantly in the open markets globally as can be seen from heavy redemptions in mutual funds. This also led to an unreasonable crash in prices of assets that are otherwise considered as safe havens and have negative beta correlations with markets such as precious metals like gold and silver.

Where the markets will make a bottom is anybody’s guess. But things are likely to worsen before any relief is seen. With crucial activities coming to halt, countries are looking at sharp cuts in their GDP growth forecasts while also standing at risk of losing millions of jobs. However, as can be seen from China’s return to normalcy, it is inevitable that this mess shall end soon. In addition, countries have announced emergency relief funds to revive their disrupted business operations, with US and India announcing US$2 trillion and US$23 billion (INR 1.7 lakh crore) in relief packages respectively.

Times like these offer investors a rare opportunity to invest in assets at very attractive prices. Instead of hastened exits, it is essential to understand that smart and disciplined investment strategies are likely to reward handsomely in the longer run. As for the economies, they will again outdo all precedents to eventually emerge stronger and larger than before; and much more capable to deal with such ‘black swan’ events for generations to come.