The first half of March witnessed one of the worst bouts of volatility in global markets: In stock markets it has been the one of the worst crashes in history; in US bond market the 10-year bond yield crashed to the lowest yield in history; and in crude it was the worst single day crash in history. No one would have anticipated this kind of market meltdown. But then, that’s how markets behave during times of panic and uncertainty. Covid-19 has wrecked havoc in markets. Risk emanating from the “unknown unknown” was it’s highest since the market meltdown of 2008.
Globally, markets are in bear territory. As I write on 17th March, most markets, including the mother market US, are down more than 30 percent from recent peaks. Sensex and Nifty are down more than 30 percent from January highs.
Where do we go from here?
During the last 20 years, in India, markets had corrected more than 25 percent on 6 occasions. On all occasions, corrections were triggered by financial/economic crises. The major difference this time is that this is a public health crisis. A crisis like this one can morph into a financial/economic crisis, if the situation lingers for long. So, it is important to watch out how the situation evolves. China has succeeded in containing the virus. Singapore, Taiwan and South Korea too have succeeded. The epicenter of the crisis now is Europe. If Europe and US too succeed in containing the virus, the situation can dramatically turn.
Recession is inevitable in 2020. But unlike the Great Recession of 2008-09 or many other previous recessions, this recession need not be prolonged. If the virus is contained, there is a distinct possibility of a turn around in the second half of 2020. With historically low interest rate and huge liquidity, a sharp and swift recovery is possible in markets.
India stands a good chance of an early and sharp recovery. Unlike in many countries, the virus has not spread in India. If we succeed in containing the virus, India may emerge as a major destination for capital inflows because of some of our unique advantages: India is not aligned with global supply chains like many other countries; the benefits from crude crash are huge. Once the situation stabilizes, there is a clear possibility of liquidity flowing into India aided by the abysmally low interest rates. On the other hand if the number of cases explode in India, the scenario will be bleak. The former probability is much higher than the latter.
The trigger for a positive turn in the market is likely to be medical/biological rather than financial/economic. If the virus is contained in Europe and US, the markets will turn. The stark reality now is that there is unprecedented uncertainty about how the scenario will unfold. Let’s wait for good news! Meanwhile don’t panic and sell stocks and exit mutual funds. Use the opportunity to buy quality stocks in installments.