We have seen large corrections of more than 20% decline in the Nifty Index in the last 10yrs, a barometer of the equity markets in India, led by various shocks but we are reasonably higher from the panic levels seen at those times.
The word resilience is derived from the Latin word ‘resiliens’, meaning ‘rebound’. We as individuals, families, societies, and corporations sometimes face untoward external occurrences in our lives that are not under our control. We cannot avoid some of these risks but as a society, we have to learn to manage the risks and to mitigate the impact of such externalities, be it earthquakes, cyclones, volcanoes, or pandemics.
The global economy has faced recessions several times in the last 50 years led by a new event every time. Be it the oil trouble in 1974-75, flash crash of 1989, dotcom bust in 2000, 2001 terrorist attacks in the U.S.A., or the Great Financial Crisis in 2008-09, we have emerged stronger.
As we would like our health to be resilient to diseases, similarly, we also desire our financials to be resilient to unexpected losses which may hamper or impair our abilities to sustain the lifestyle. Hence, savings, investments, and insurance should be a critical part of our arsenal to ensure safe and stress-free lives for us and more importantly for our loved ones.
Generally, we have seen large corrections of more than 20 per cent decline in the Nifty Index in the last 10yrs, a barometer of the equity markets in India, led by various shocks but we are reasonably higher from the panic levels seen at those times. Post these sharp corrections, where it became a fashion to forecast doomsday scenarios for the markets and the economy, the human ingenuity and resilience helped the market scales pass the previous peaks. The lower valuations (at 15x PE), the decline in interest rates (250 bps decline in repo rate to 4 per cent), reforms by the government, and ability of a large section of corporate India to withstand such shocks fuel the rally. Also, the massive pumping of liquidity globally is already 3X of what was done during the GFC. Though, this time the shock is more ominous and may be difficult to tame but led by a combination of cures and treatments, self-imposed social distancing and better hygiene habits will help us recover from this upheaval too.
Risk management is something that we hear regularly but seldom evaluate or implement it for ourselves. Most of us, during the lockdown at our homes, would’ve realized the value of insurance as a risk mitigation tool. The financial markets in March 2020 witnessed substantial turmoil with equities seeing the steepest 35-40 per cent decline and businesses/incomes froze. It is times like these when we need a fallback mechanism like insurance.
Covid-19 has led to unprecedented health, social, and economic impacts globally. But this is also being countered by the best ever scientific ability of the human race to mitigate the impact and develop solutions. The efforts to determine a treatment for covid19 and to develop a vaccine are also unprecedented in magnitude and capability. The scientific prowess developed over generations, now aided by quantum computing and artificial intelligence coupled with global coordination could lead to safer and reliable solutions to manage the pandemic.
by, Prashant Sharma, Chief Investment Officer, Aviva Life Insurance