Coronavirus Crisis (COVID-19)
30 March 2020
The Coronavirus scare has caused widespread panic among investors, causing the financial markets to drop by historical levels over the last few days. Ever since WHO announced the novel Coronavirus outbreak as a pandemic, markets have plummeted, with indices like Sensex dropping nearly 3000 points on multiple days. Though the stocks have somewhat recovered (emphasis on somewhat), we’re still staring at historical lows, with pundits even beginning to speculate a fear-induced recession, as discussed in our previous post.
As an investor – should you cut your losses and sell your holdings now? Here are some facts to help you make the decision.
This is definitely not the first pandemic that has caused widespread panic leading to temporary turmoil in the global markets. Previous outbreaks like SARS, EBOLA, had also caused severe market reactions (though not to this extent, as the spread of the virus, was not nearly as contagious). However, the market has always bounced back and “corrected” its course in a 12 month period after the initial crash. There have also been indications of the Indian market correcting itself recently, the short term implications do not seem to be great for the investors. In the short term, experts are predicting a further 8 to 10 percent drop in the prices.
The Coronavirus impact on the stock market is comparable with the 2008 burst of the dotcom bubble in terms of the magnitude (an ex-Obama advisor has actually gone on to call it worse than 2008), but it’s not the worst recession of all time. Historically, the markets have always corrected itself, getting back to bullish markets within a year or two.
Source: Financial Times
The silver lining of this outbreak is the fact that those who want to enter the market, to buy and hold for the long run, will get the cheapest prices to buy shares or index funds. Though prices may be likely to dip more as countries like India still seem to be in the early stage of the spread, they will certainly not recover till the outbreak shows signs of containment. That being said, the loss of money on paper should not scare you from investing right now, provided you want to hold for the long term (atleast 5 to 6 years). Exit strategies should be based on the state of the market then, but choosing the right set of stocks (risky, but the higher rate of return), or going for a broad index fund (safer, but with a marginally lower rate of return), is very likely to earn you money on the long run.
Source: Dow Jones Market Data
In the current market conditions, for the next few weeks, a bear market may be prevalent. Though there was a short span of reversal of trends on the 13th of March, due to the widespread disruption of the economy because of Coronavirus, and panic among the investors, the price has continued to dip.
If you are someone looking to invest in the short run for some quick profits, you may find better luck in holding off on investing in the stock market and going for safer investments with low leverage. On top of the spread of COVID-19, the untimely crude oil wars, and the world’s businesses being brought to a standstill, short term losses are inevitable. History tends to repeat itself, and the market will eventually correct its course in a few months, with the IMF and governments across the world trying to guide the economies through a rough period, financially and socially.
Amidst the crude oil price crash, the increase in the value of Indian rupee, people usually find gold to be the investment to rely upon during the time of crisis. However even Gold rates have been going down recently, but some argue that they remain a good bet to diversify your portfolio and hedge your risks. It is better to invest your money on fixed-interest bonds or deposits if you are looking to exit in the short run.
The market, as it is right now, is pretty volatile. It is in the best interests of everyone to not panic, and get jilted by the temporary loss of money on paper temporarily, and to hold the investments and wait for the market to get back to normal.
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