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2020 has been a year of unprecedented volatility, starting from the problems in West Asia led by Iran, following up with China Coronavirus, Union Budget, breaking of OPEC-controlled oil prices and the subsequent spread of virus from China to other countries, leading to a World Health Organisation (WHO) declared pandemic. The effect of all these events has led to a massive dent in sentiment and global markets have corrected sharply.
From a global perspective, there is an expectation that economic growth will take a big hit, as countries lock down to control the spread of the virus. Global equity markets are thus correcting anticipating prolonged crisis.
Various Governments, and their respective central banks, have come in with fiscal and monetary measures to ease the pain of demand shock in the short-term. While volatility has risen to 2008 levels, we have to be careful to compare the current situation to 2008 global financial crisis (GFC). In my view, both the events are very different and not comparable. Once the fresh new infection cases plateau, like we witnessed in China, normalcy should resume. In addition to the virus, oil prices have also seen a sharp correction. Failure to arrive at production cut targets among OPEC has added to global risk-off.
What we've read or seen about the pandemic, it is expected to stabilise within a few months as a concerted effort is being put together to curb the spread. Meanwhile, though this is likely to have a short term impact, it should not structurally change the dynamics of an economy, making this a temporary phenomenon. In the interim, the fear factor is likely to be at its peak. The effect of coordinated monetary and fiscal easing leading to demand incentivisation and liquidity will show its full effect on the economy and markets once this short-term fear abates.
The Indian Government, too, has been proactive and have initiated various measures to control the spread of virus. That said, there have been some encouraging green shoots on economic data over the last few months - viz. better Index of Industrial Production (IIP) and Purchasing Managers Index (PMI) numbers. Lower crude prices may lead to lower inflation, and looking at our high real interest rates, there is a scope of a sizeable rate cut by the Reserve Bank of India (RBI). The Indian economy per se is in a sweet spot, wherein we are largely dependent on domestic consumption and have relatively lesser global influence.
From an equity market perspective, we have always been complaining of relative higher valuations. After the current market correction, valuations have become attractive and provide a great entry point for a long term investor. Hence, the current problem that looks to be temporary, isn't changing the longer term structural economic growth opportunity. Strong businesses will bounce back equally sharply post the stabilisation of pandemic.
Investors should look through the shorter term pain and as the longer term investment opportunity looks very attractive. That said, the short term volatility would continue to remain elevated and investors need to manage risk. It is generally said that return is a factor of risk you take, and maybe this is a time where we should take risks to benefit from the potential of earning better returns from equities in the long term.
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