Impact of COVID-19 on the Stock markets & Economy
Authored by Shivang Ranjan & Arijit Das
The graph of COVID-19 spread has been increasing exponentially, with the eurozone being the epicentre. As of 30 March 2020, India has 1071 cases & 29 deaths (source: WHO). This virus has been affecting the world economy. Also, financial challenges and corporate debts which exist have only intensified the ongoing suffering. Ray Dalio(cofounder of one of the world’s largest hedge fund) who doesn’t like using the word “recession” however did mention that “Economy looks like 1937 and a downturn is coming in about two years” which seems to be turning a reality now.
Considering India is a consumption based economy, since demonetisation and the implementation of GST, there has been a major impact on the consumption standpoint.
The year 2019 was said to be one of the slowest for the consumption sector in over a decade, largely impacting smaller markets and the agrarian economy where liquidity crunch has been a major problem.
Reviving consumption is essential as it is one of the major components of GDP growth rate. Data released by the Economist Intelligence Unit reveals that large economies might be entering recession soon, and it doesn’t seem too pleasant for India too. Our country is also facing a massive slowdown, which economists have signaled can lead to India falling into a middle-income trap.
While India did start sprinting towards the goal of a high-income economy after the economic liberalization in the 90s, there is a fear that it might face challenges to attain the ranks of rich nations if there is a sustained economic slowdown.
McKinsey & Company also published a new report on 25th March 2020 titled “Covid-19: Briefing Materials” stating that it could take three years for the US and the Eurozone economies to recover from Covid-19.
Unemployment rate in India is also high at around 7.34% from 2018–2020. It has huge costs for the economy: Lower GDP for the economy, increase in social problems, political instability, stress and health problems, potential homelessness and also a loss of human capital. All this certainly needs to be addressed.
India being an emerging market is also quite fragile. Pandemics like this cause a huge dent to the economic foundations that take a lot of time to repair. The NIFTY 50, one of indices of the Indian stock market touched an all time high of 12,430 in mid-january. Investor’s rejoiced & were already making year end targets for more highs, which seem impossible now.
Year To Date, the markets have fallen ~32% which is considered to be the worst fall in 28 years & over 7 lakh crore of lost market capitalisation value. Initially, the COVID-19 spread in the country was very miniscule & manageable. Once the cases started to grow rapidly, it’s impact was felt by the markets as they fell below 12000.
One thing is for sure, market participants are riding on pure panic & emotions. Rationality had left the market long back. Solid companies i.e those with good fundamentals that have performed consistently over time as well as the weak ones are getting a massive beating. Benchmark stocks like Reliance & HDFC prove the point.
If not fundamentals, surely technicals will help predict or find a bottom right ?! Nooo! No bullish engulfing or cup & handle or inverted H&S is gonna tell anything.
It all relies on how long COVID-19 lasts & the nation’s ability to cushion the impact. If matters get worse, it won’t be surprising to see markets breaching the 2008 levels and going even further down, where it fell by 55%.
Recovery is definitely not coming anytime soon, it will take time for things to settle down.
Patience, control & thoughtful cash deployment however can make this bear market an opportunity of a lifetime for well-informed investors, not speculators.
Shivang & I are both engineering students. This publication is to share our understandings of our interest in financial markets & economics.
