The global economy that was already struggling to overcome the economic slowdown due to the trade war between US and China has received another jolt in the form of COV-19 pandemic which has engulfed large swathes of the civilized world. Economies around the globe big or small are reeling under the epidemic, economic activity has come to a standstill and as of now there is no consensus on how long this epidemic is going to last. Most of the world's population is locked down in their homes, business is affected severely and the future financial implications in terms of lost productivity and an expected slow economic recovery have spooked financial investors across the world.
The global response to this pandemic has been more focused on curtailing the economic impact of the crisis with the US taking in lead by announcing its biggest financial rescue plan in history; the EU is also not far behind. Indian response to this crisis has been two pronged, the first aspect being the complete lockdown of the entire country, coupled with a massive liquidity infusion through the central bank and relief measures from the Indian government.
The outbreak at present poses a health risk which needs to be dealt with alacrity, however, the economic impact of this epidemic will be felt for a long time and there would be a slow path to the recovery. Following travel restrictions and a comprehensive lockdown several sectors of the Indian economy such as airlines, tourism, hospitality have come to a grinding halt, the lockdown has also affected all facets of the Indian economy with the auto industry being the hardest hit. The crisis in the economy has been manifested amply in the stock markets which have witnessed deep corrections across the board; the following graphic depicts the severity of the market corrections in various indices which on an average have seen a correction of upwards of 30 percent from their recent 52 week highs.
In the past one month, the Sensex has broken record of biggest single-day fall five times. On March 23, the Indian benchmark indices Sensex and Nifty logged their highest losses ever, losing 13 percent in a day. The near term coronavirus-induced volatility in the share markets has wiped off more than Rs 50 Lakh Crores of investor wealth. Indian volatility index INDIA VIX has risen to a high of 86.64, and currently it’s trading at 70.98, with such elevated levels of fear in the markets a quick recovery can only happen if there is positive news around a scientific development that could potentially cure or contain the epidemic.
The following table summarizes the market cap loss of the Nifty 50 stocks that constitute the majority of the stocks which are actively traded in the Indian equity markets. It can be seen from the table that the aviation sector has been the worst hit with industry majors Spicejet and Indigo correcting by over 76 percent and 47 percent respectively, stocks in the auto sector and the financial sectors are also among the sectors that are worst hit by the epidemic.
India’s growth slowed to a near seven-year low of 4.7% in October-December 2019 on continued slump in manufacturing, and yet again Indian economy faces its biggest challenge in the form of COVID 19 outbreak. Although, the Indian Government has announced sufficiently large financial package along with significant liquidity infusion from the Central bank (Rs 374,000 Crore), however the effectiveness of this package will only be evident in due time.
At this point of time the various incentive packages announced by the Governments, and the lower crude price that has slide $25 a barrel can partially offset the economic impact of COVID 19, however, the ongoing lockdown will hurt the economy severely in terms of lost productivity. A slowing Indian economy will be paralysed in multiple ways, first, it will disrupt the existing supply chains and economic activities at the ground level will come to a halt. Absence of movement of people and lost labour productivity will paralyse the services sector which is the backbone of India’s economy. The immediate impact will be on consumption and wages as daily earners across sectors, small vendors and workers in small and medium enterprises (SMEs) stop receiving their payments, in turn, curtailing their purchasing power further. This will have a cascading effect on large companies. Shutdown in manufacturing activities will lead to massive job losses across board, it is expected that the current shutdown of the Indian economy for a period of 21 days will shed a whopping 8 percent from the Indian GDP on a higher side and approximately 4 percent on the lower side.
At present the markets are in a phase of uncertainty with no visible trends, the only thing that can be said with some degree of confidence is that if the COVID-19 pandemic does not dissipate in the very near future we can expect significant downtrend even from these levels. From an investment point of view, the Indian markets would continue to see period of heightened volatility. In the near-term global cues and developments on the coronavirus front would dictate the market trajectory. The participation of the Foreign Institutional Investors (FII’s), the rupee dollar exchange rate, the global crude prices would all serve as catalysts to the Indian equity markets.
Going forward in the near term and any sustainable rally would largely depend upon how effectively we can contain the spread of coronavirus now with a 21-day nationwide lockdown in place. History suggests that any market crisis or epidemic has its own cycle and the economy is bound to jump back to normalcy, though the exact time frame can’t be predicted. The deep market correction has created a rare opportunity for long term investors to accumulate good quality stocks at deep discounts from the perspective of long term wealth creation. Investors can use this opportunity to create investment portfolios of large cap stocks with solid fundamentals, stronger balance sheets and a track record of consistent revenue and earnings growth. Investors are also advised to desist from creating any short term positions because with volatility staying at current elevated levels the markets are expected to take wild turns in either direction which could hurt one’s investments significantly.