Coronavirus Pandemic has induced a steep correction in equity markets over the globe during the last few weeks. Except China, all the global markets are witnessing a steep sell-off and the situation is not expected to get better over the course of next few weeks. However, many long-term investors with a 10-year timeframe are using this as an entry opportunity. The markets have not witnessed such panic since the global financial meltdown of 2008. Market participants are expecting the markets to recover the same way as it did from 2009 onwards. This may prove to be a fair assumption given the fact that Covid-19 perhaps could be well behind us post June 2020. However, can we compare the current scenario to the market correction of 2008? Absolutely Not.
The Markets are currently still digesting a fast evolving situation
Markets are always forward looking and in most of the cases by the time the crisis hits the economy, the markets have already priced in the scenario. Except in some cases like the housing market bubble leading to fall of Lehman Brothers, which shook the entire global economy in September 2008. The US markets plummeted from September 2008 onwards and continued to correct till March 2009. Further, once the event is done the investors can take an informed opinion on when to enter the markets by evaluating the impact of the event on the economy.
However, the current scenario is different. Covid-19 is still a fast-evolving situation. Currently, there is no visibility on when the situation will be back to normal. Therefore, it is difficult for the investor to judge the extent of slowdown. If the lockdown or partial lockdown continues till May 2020, then we are looking at very completely different levels on Index as compared to a scenario where the situation normalises by April 2020.
The longer the lockdown, the more painful will be the correction and the more difficult it will be for the investors to find the bottom.
The recovery timelines for different countries will vary substantially
By now it is very clear that all the countries globally are going through a war-like situation. Each country has developed its own mechanism to fight the Covid-19. Some countries may be out of lock-down in few weeks while other may take months to recover. Therefore, even if India recovers rather quickly, the economic recovery will also depend on recovery of its trade partners. For example: If the US’s fight against virus continues till June or beyond, it will invariably impact the revenue for Indian IT companies. Further, the overall outsourcing and exports business will also take a hit similar to events that unfolded post 2008 crisis. However, with Covid-19 rapidly spreading in the US market, it is further difficult for the investors to decide their entry point. The recovery is currently nowhere in sight.
The Global Central Banks do not have the same ammunition as they did in 2008
The US benchmark rates were at around 5% till 2007. As the housing crisis unfolded, the US Federal Reserve dropped its interest rate to near zero. Also, the Fed announced Quantitative Easing to pump money into the financial markets post the 2008 meltdown. Today, the benchmark rates stands at near zero after recent cuts due to outbreak of Covid-19. Further, the federal debt to GDP for US was around 65% in 2008 and today stands at 105%. The last time US’s federal debt to GDP was above 100% was post World War II. Therefore, the US has very little ammo to revive the economy on immediate basis post Covid-19 is contained. Further, even for UK the national debt as a % of GDP has increased from around 49% in 2008 to 86% in 2018.
Therefore, major countries in the world do not have enough ammunition to fight the slowdown. The economic recovery will be a very gradual and painful process due to limited resources available. This situation is completely unlike 2008 where we saw a steep recovery post announcements of Quantitative Easing by various countries alongwith drop in Interest rates
These are unprecedented times; do not try to catch the falling knife
Many Investors may have already entered the market post market corrections since first week of March. However, the healthcare situation is much more grim today than the beginning of this month. Domestically, many major districts will be in lock-down till March 31 and there is a possibility the same may be extended. Many states in US are already under partial lockdown and the country is also in for a long haul with Covid-19. The fight for the US would be very difficult given the fact that country was late to react during the first 3 weeks. The same is the case with UK and Italy.
The correction may look like an opportunity of a lifetime to deploy cash. But in a war-like situation, asset prices have no value. The equities may correct to levels which perhaps none of us could have ever imagined. The relative valuation, cash flow models have no meaning in such scenarios. An investor may therefore wait for the dust to settle and buy during recovery phase, even if that means buying 10-15% higher the bottom price. It is still a better option than to buy now and watch your stocks correct further 50%.
TAKE GOOD PRECAUTIONS AGAINST COVID-19 AND AGAINST ITS SPREAD IN YOUR COMMUNITY!