An old market proverb is that "markets stop panicking when
the government begins to panic". However, the current market conditions
appear defying this conventional wisdom. Instead, the panic shown by the
government authorities in dealing with the threat posed by the novel
coronavirus (COVID-19) has caused deeper panic in the financial markets.
From the statements made and actions taken by various state
authorities across the world (including India) to check the spread of the
coronavirus, I decipher the following:
(a) The coronavirus has
spread to a large number of countries. Even though the mortality rate of
patients suffering from the virus may not be high, the transmission is much
faster, and it threatens large scale immobility or people and disruption of
business. In that sense it is perhaps one of the most disruptive pandemic for
the modern generation. The spread of bubonic plague in 19th century (though
that had massively higher mortality rate) could be the only appropriate
parallel to this.
To this extent, the panic reactions of the government may not be
unwarranted or inappropriate. Though many may like to argue that complete ban
on travel could have been avoided by comprehensive screening mechanism at the
ports of departure as well as the port of entry.
(b) The indications from
China is that the Chinese authorities are in full control and new cases of
infection are negligible now. The businesses have started the process of
normalization and in 4-6 weeks shipments could return to normal level.
Similar, indications have been received from South Korea, Hong
Kong, Singapore, Vietnam, Taiwan, Thailand and Malaysia etc.
The number of cases in heavily populated South Asia (India,
Bangladesh, and Indonesia) is also well within control.
Regardless of the alarm bells sounded by German Chancellor, WHO,
and European Commissioner, the coronavirus may be declared under control latest
by the end of April.
(c) The disruption is
likely to have significant impact on shipping, travel and hospitality
industries. The loss of business for them in this quarter may be permanent in
the nature.
(d) So far there is little
indication that the spread of coronavirus may have impacted the household
income significantly. The impact on household consumption may not be material,
or at least not permanent. At worst, we may see some deferment of the demand
till the conditions normalize.
(e) As of this point in time,
there is little indication that the disruption may cause any significant change
in the business practices and procedures. Redefining necessary travel, work
from home, virtual meetings, etc are some trends that may not be materially
stimulated by the coronavirus. I expect these trends to follow their normal
trajectory.
(f) The business
disruptions caused by the coronavirus related developments, could prove to be
fatal for many micro businesses as well as many large businesses. For example,
a small eating joint may default on its debt repayment obligation and face
closure. Similarly, many large businesses which are already stressed may breach
the fault line and become defaulters. Financial sector will have to deal with
this. The role of regulator would be critical in managing this situation. They
must proactively allow the banks to assess which accounts to allow relaxation
and to which not.
At this point in time, I see no reason to change my investment
strategy as discussed couple of weeks of ago (see
here). I shall continue to shift my debt and gold overweight to equities
over next 3 weeks.
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