Today, the world has understood that it is a disease that can be brought under control by stringent lockdown, improvisation in health policy, development in treatment and vaccination in the future.
- By Vinod Nair
The world took time to realize the pandemic risk of Covid-19, the world equity market started to fallout lately by the end of February. In January & February, market thought that this will be a local epidemic like the last epidemic of SARS, MERS & Bird Flu the implications of which will reduce in few quarters. The market was hopeful even when the health crisis reached European countries but the confidence lost quickly, though late, as understood the risk of contamination, fatality and health requirements are very high. Sooner the consequence to the equities was very quick, leading to panic selling and funds shifting from risky assets to safety. This led to the first phase of correction, Indian equity market collapsed by 40% from the peak to the recent bottom which was less than 2 months. This was led by FII selling, high rate of cases in developed markets and lockdown in domestic & developed countries. This selling has stabilized a bit in the last trading week but high volatility prevails. The market has settled to a view that the world economy will be in recession for CY2020 but doesn’t know how long or short it will be. A lot has been factored in the market and will be watchful with a critical view. The financial market environment may improve or derail if the lockdown advances as successful or otherwise. Today, the world has understood that it is a disease which can be brought under control by stringent lockdown, improvisation in health policy, development in treatment and vaccination in the future.
In India, the pre and post lockdown arrangements & measures are well acceptable comparing to the issues being faced by rest of the world. Till date the government is confident and maintaining the stance that the domestic economy will be opened on 15th April. Though it is predictable that it will be with restrictions on public gathering & traveling till new cases in domestic & international markets reduce. Sudden increase in cases, cases reported in high-density locations and disorganized events has added risk for the deadline to get extended.
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While the situation in the international market is unstable, the main reason being late lockdown and non-stringent measures to limit health risk. Though late, strict lockdown has been announced in all the countries with some caveats. The lockdown was successful in countries like China, South Korea and Japan due to firm measures which run over a period of about 2-3months. We can also expect a similar result for the rest of the world if stringent measures are announced. Developed countries announced on March & some in April with variations on the degree of strictness. The world is hopeful for better treatment and drugs.
CY2020 will be a recession is factored in the market and the short-term trend may prevail negative till we see valid improvement in the world’s health-meter and success of lockdown. Government and financial markets are supporting the public & corporates with fiscal package, monetary measures and relaxation in compliance law. A complete improvement can happen based on eradication, better treatment and vaccination. If economic restrictions are not limited to less than 3months, the fallout to the financial market will be very hard leading to collapse & bankruptcy in corporate & government’s fiscal. But if the main thesis of scenario that April to June will be the worst quarter for the world post which we will have improvement on a QoQ basis, then this is the time to accumulate for long-term capitalization.
- (Vinod Nair is Head of Research at Geojit Financial Services. Views expressed are the author’s own)