COVID 19, the virus that originated in China but grappled the whole world in a short span of few months imposing a huge threat to global economy and financial market. It has already claimed the lives of around 20000 people whereas the number of total infected people are more than 450000. The rising number of deaths is still a major concern. The virus is not only affecting our health but it’s also hurting investment portfolios badly. Its rare sight to see the Indian stock market reeling under the pressure of global slowdown and growing fear of Coronavirus outbreak.
Stock market witnessed a blood bath as Nifty and Sensex went down to a multi month-low. In the history, 23rd march 2020 is the worst day for the equity market when some shares fell by 20-25 percent. Even a company paying good quality of dividend with the track record of 15 years has just been thrashed. As economic disruption can be easily seen in domestic as well as global markets, it’s difficult for an investor to sit calmly in this horrific situation. In a state of panic, the investors are pulling out their money which is further affecting already crashed market.
To safeguard the wealth of investors in June 2001, an Index-based market-wide circuit breakers were introduced by SEBI. Circuit Breaker is basically a band of upper and lower limit with which a benchmark market index are allowed to fluctuate on any particular day. This mechanism is put in place as regulatory check, to curb the excessive volatility and panic selling. The breakers are applied at three stages: – 10 percent, 15 percent and 20 percent. It keeps close watch on the movement in BSE Sensex & Nifty 50 and it is triggered when either of these indices breaches the mark. When triggered, it brings a situation, where all trading activities in the stock market are brought to a halt. Afterwards, the market reopens with pre-open auction call.
On 23rd march 2020, for second time in just two weeks, the trading in stock market was stopped for 45 minutes. It happened after both the equity benchmarks, Nifty 50 & BSE Sensex touched their 10 percent lower circuits. BSE Sensex was down 2991 points or 10 percent whereas Nifty plunged 982 points or 9.6 percent. After 2008 Global Recession, the first time on 13th march 2020, trading was halted after the sharp fall in both the indices. The market has lost almost 20 lakh crores due to this steep decline in both the indices.
The uncertainty in the market has further increased as COVID 19 is a global pandemic now and it’s affecting economies across the globe. This has created a downward spiral because investor across the globe are scared and plunging their money out of the market as they are skeptical over the future role of central banks in managing the monetary policies. According to reports, FII’s have been consistently selling their stake, leading to the biggest ever monthly outflow.
Economists from the big investment firm like Morgan Stanely and Goldman Sachs also believe that COVID 19 is pushing economy towards recession and expect growth to fall to as low as 0.9 percent this year globally. The concern of investor becomes pertinent after the recent cut in growth forecast by the Fitch, which conquers with the views of other international rating agency like OECD and S&P. The agency has slashed India’s growth outlook projection from 5.6% to 5.1% for financial year 2020-21, as manufacturing sector in India has taken a severe blow by the spread of Virus. The debate is further aggravated by the Steve Cochrane, an analyst from Moody who said “for the global economy, our forecast has been adjusted down from prior to 2.8% to about 2.5% for 2020 which is measurably below potential, which means that some countries that are hit particularly hard will see higher probability of recession or rising unemployment rates.”
SEBI has introduced measure of revising the market-wide position limit to 50 percent. The regulatory body expect that this will lead to a reduction in number of short selling position in the stock market. The tightening of rules is essential to manage the extreme volatility and therefore is been hailed as welcome gestures from the investor.
But contrary to this, Indian market analysts paint a different picture. According to them, in past, whenever such outbreak happened, the market took a toll. But simultaneously, they saw it as a huge opportunity from the market point of view and expect that resilient market will soon bounce back, as condition improves. China, which was the epicenter of the virus outbreak, saw its market fall extremely low due to the preventive measures like lockdown taken by the Chinese authorities. However recently, Chinese stock market gained a strong momentum after several months of underperforming market and indices keeping at all-time low. This gives a ray of hope to further believe in a similar V-shaped recovery for Indian stock market. As the stock market is cyclical in nature, there is always turbulence in the market. It’s very difficult to predict when recovery will take place but as seen in the past, the market will recover eventually.
Therefore economists are presuming to have U-shaped recovery curve in context of Indian stock market. May be the downward spiral continues in the near future, reaches a flat bottom which may persist for some time. However as the news of containment of virus comes and situation began to improve, the market will rise upward and hence making it a U-shaped Curve. The chief of Citi Bank, Tobias levkovich, in his recent interview also showed some signs of relief and conveyed that “Direct effects of foregone profits already are incalculable and the secondary ramification on commodity price, make the number even more difficult, but it is plausible that things won’t get worse”. The bank is however skeptical of the investor’s view that the recovery will have V-shaped curve and it believes that there is high chances, the market will recover in U-shape.
Market expert believes that it’s not first turbulence ever to hit the market and it won’t be the last. Some experts are of an opinion that it’s a best time to pick long term equity at a cheap value. However, the focus should be on the businesses that have survived the test of time. The investors are advised to not make any panic decision but to follow a basic investment rules. Further, companies without leverage and with cash flow generating characteristics are better option in times of recession. Diversified portfolio across major asset classes and major sector is a key to survive. Another sector which is immune to slowdown is healthcare, especially Pharmaceuticals. The only risk would come from the fresh regulation and essential drug prices control law that government might bring. Due to their stable demand in tough times, acute care and chronic drug companies may emerge as winners. FMCG dealing with essential commodity, having a regulated return could also be a good option to invest. Therefore, the investor need to stay calm and confident that the market will slowly but surely emerge out of this dark time.
Author: Dr. Neha Nainwal, Dept of Commerce, Lakshmibai College, University of Delhi
