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As human beings, what we fear the most in this world, are the things that we have no controlrnover, things which are unexpected and completely random. Hence, to avoid any surprises, forrnevery aspect of our lives, let it be social, political or financial, we have built a system in whichrnwe find ourselves safe, sound and comfortable. We have developed a sense of judgement byrnwhich we anticipate how much the system can work well or how much it can go wrong.rnHowever, every once in a while comes an unexpected crisis situation which shakes the entirernsystem and proves us that our notion of absolute control over each and everything is only anrnimaginary concept.
As of March 24, 2020, the novel coronavirus, or COVID-19, pandemic has sickened more thanrn3,81,739 people in at least 195 countries and over 16,558 people have died, more than half ofrnthem outside China, where it first began in the city of Wuhan. If this deadly virus has dentedrnlives of so many people, how financial markets are going to be any different.rnThe more worrying factor in the current market situation is not the quantum of fall in the stockrnmarket, it is the frequency by which the market has fallen. The only time the Indian stockrnmarket had fallen more than 50% in last 20 years was during 2008-09 Financial Crisis.rnBelow is the chart of fall in NIFTY index during the 2008-09 financial crisis. The NIFTY fellrnfrom 6,000 level in Jan 08 to 2,500 level in Nov 2008 i.e in 9 months time, it fell by aroundrn58%.
Now if we see, NIFTY chart for the past one month (i.e 24th Feb 2020 to 23th March 2020), wernwill see that NIFTY fell down from 12,000 level to 7,500 level. In other words, a decline ofrn38% in just one month.
Probably we can guess a thing or two as to why this has happened. One thing about stockrnmarket is certainly true, the market in its anticipation, is ahead of the curve. Whether it’s a goodrnnews or the bad news, the market always imagines and reacts to the things which are yet tornhappen. When one patient gets tested positive, the stock market will always assume thernsituation and react as if 100 patients are found positive. The reactions are not always correctrnbut in case of a global pandemic like COVID-19, it can be said that they are are very muchrnvalid and necessary.
There is a fundamental or rather a psychological difference between the two happenings whichrnwe discussed earlier. Facing a virus outbreak is more frieghtening as compared to facing arnfinanical crisis. A virus directly takes lives of people where a financial crisis affects themrnindirectly. Additionally, COVID-19 has proved out to be deadlier than any of the earlier virusrnoutbreaks in India in last 20 years. Hence the panic in the minds of investors is pretty muchrnvalid and the volatility in the market is here to stay for sometime now.
COVID-19 is a global virus outbreak but there is no doubt that it has quickly got translated intorna global financial crisis as well. We must also keep in mind that before coronavirus came intornthe picture, global economy was not in a very promising situation. Many countries includingrnIndia, were already facing a slowdown.
Currently, all industries are either working at a fraction of full capacities or facing completernlockdown. With international trades coming to a halt and all the governments under pressure,rnit has become a worrying worldwide scenario from the financial point of view as all these rnhappenings are going to have a serious impact on the sustainability of the industry and thernworld economy.
The question arises as to what will happen to the Indian economy & stock markets goingrnahead? It depends on how the virus spreads in our country and for how many days we are facingrnlockdowns. If we are able to control the spread of virus by the mid of April 2020, the damagernto our financial system can be well within our controls and there can be some definite postivernimpact on the stock market. Look at how the stock market increased two folds from Marchrn2009 to Jan 2010, once the financial crisis of 2008-09 was resolved. We can see some positivernmovement of NIFTY in the upcoming months. We can guess that the positive reaction shall bernmuch quicker but shall be relatively smaller. Smaller, because it also depends on how otherrncountries are able to control the virus spread.
The worse outcome is if the patients go on increasing exponentially, just in the case of Italy orrnIran, then we might see a severe impact on our economy which can last up to next 9 or 12rnmonths. Then the Indian economy and stock markets will be expected to go down further or atrnbest case will remain passive at the current level.
As the final chart suggests, over the period of 22 years in that NIFTY chart, a lot of things havernhappened from terrorist attacks, riots, frauds to financial failures. However, the economy andrnstock market have always prevailed in the long term.
A virus outbreak of this large extent is completely foreign for our entire financial system,rnsomething which we never faced or anticipated and something which we were never ready forrnbut it does not mean that we should completely lose hope as investors. Probably, the only goodrnthing about every crisis situation is an opportunity to learn from it.
rnProf. Siddhesh SomanrnAssistant Professor,rnDR. V. N. BRIMS
Sources:rnwww.moneycontrol.comrnwww.worldometers.info/coronavirus