Covid-19: The perfect fear in the market

This distortion in markets is an opportunity to lap up quality assets that are mispriced. However, in the current environment, it is best to remain cautious

Updated: May 4, 2020 12:44:26 PM UTC
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Just like life is a series of ups and downs, the economic and market cycles are a series of peaks and troughs. When you are at the peak, it is difficult to envisage the bottom and when you are at the bottom, it is challenging to see light at the end of the tunnel. While many of us prepare to combat the “known” unknowns, there are always events that take us completely by surprise.

What started out as a virus initially impacting China, spread rapidly to the rest of the world. The coronavirus and its rapid spread across the globe is seen as a black swan event of 2020. Considering that this is an evolving situation, it would be difficult to accurately assess the impact of the coronavirus on the global as well as Indian economy. Epidemics like SARS, Ebola and Swine Flu have caused havoc in the past with much higher fatality rates. In comparison to other epidemics, the coronavirus has a lower fatality rate, much lower than ~10 percent for SARS and approximately 5 percent for swine flu.

Even as the virus spreads, more harmful and contagious is the fear and panic. Historically, the fear of the unknown has led to panic selling in the market. In such situations, it has been observed that market participants generally tend to overreact during the outbreak. However, as normalcy returns, the markets more often than not recover lost ground. In adverse environments, it is fairly easy to make pessimistic prognoses. That is not to say that there will not be any pain in the ensuing period. The outbreak of the coronavirus has certainly changed the near-term narrative. It is widely acknowledged that global growth will be impacted. What remains uncertain is the depth and breadth of this impact and the timeline of recovery. The virus is already impacting routine life, as well as, business activity with factory shutdowns, travel bans, school closures and cancellations of mass public events.

An optimistic scenario will be the spread of the virus is contained post the extended lockdown, and the economy gets some boosters to spring back to life albeit slowly. Hopefully, the global scenario too will get better and there will of course be disruptions in many businesses, which in turn will impact employment and a host of other macro parameters. The market could discount the short-term blip caused by the lockdown and equity prices could head back northwards. It is also important to remember that enterprising leaders will find ways to thrive in new situations and adapt to the changing circumstances. On the flip side, an extended lockdown or sluggishness in companies restoring normalcy could be frustrating and lead to even more reduced commercial activity.

The sell-off across asset classes is often less to do with the fundamentals of that particular asset. We have seen some of the best assets being dumped on account of greater liquidity and demand. This distortion in markets is an opportunity to lap up quality assets good assets that are mispriced. In the current environment, it is best to remain cautious. Invest gradually, even though prices may be cheaper than a few weeks ago, and be agile enough to quickly respond to any adverse developments in the markets. This too shall pass.

The writer is, Executive Director of IIFL Wealth and Asset Management

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The thoughts and opinions shared here are of the author.

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