With the number of coronavirus cases escalating across the world, pessimism has skyrocketed. Efforts at containment are being watched closely. So far, there is not much optimism that it is being controlled in the US and Europe, two key global markets.
Markets may have to endure more rounds of choppiness as investors continue to assess how much damage the virus can inflict. Investors will want to see a reduction in the total number of cases, which has nearly tripled in the last two weeks to three hundred thousand.
The US is now the third-largest affected country after Italy. This is clearly worrisome as the US is the biggest consuming nation in the world. When the coronavirus initially took off in China, investors were only worried about a supply-side issue, but with its spread, a global demand-shock is spooking investors.
But there is hope. Some countries have demonstrated that the virus can be contained like China/ But that will require coordinated efforts of the policymakers and co-operation of the people to stay indoors. The government announced a near-total lockdown of the country with a ‘Janta Curfew,’. The Maharashtra government has also announced that all workplaces will down shutters till 31st March.
But markets have been unforgiving. The 50 Nifty nosedived 28% month-to-date with almost all its losses coming in the past month. A sliver of recovery at the end of last week may get sold into again.
At this juncture, valuations look attractive than a month ago. Indicators such as the price-earnings multiple dipped from 27.6 times earnings to about 19.7 times in the past month, near to its historical averages. Is this a signal that the market is bottoming out?
This is not an easy call. Analysts at Kotak Institutional Equities echo a similar dilemma. “We feel like Buridan’s donkey in terms of stocks to recommend given the large potential upside to our 12-month fair values in almost all stocks that we cover. We hope investors avoid the fate of the unfortunate donkey by debating too much about (1) the stocks to buy when most stocks look very attractively valued and (2) the ‘bottom’ prices of stocks to buy at. In our view, the study of flows and past crises offers little guide; the focus should only be on the gap between value and the price of stocks," said analysts at Kotak in a recent report.
Besides, volatility has zoomed closer to its 2008 crisis, but valuations are still some distance away from those lows.So its difficult to make an assessment on the bottom.
Besides, in fact, companies could be affected in many ways even in the long run. Earnings of realty companies providing office space could be hit as people increasingly become to work from home. While socializing and outdoor recreation gets curtailed, alcohol companies may also see some loss.
SEBI has tightened trading rules and has increased margins, though. But it’s still a difficult market and investors may need to brace themselves to endure pain for longer. There is no precedence of a similar crisis in history. Analysts at Equirus Securities pointed this in a note. “In the last 100 years, only the Spanish flu comes anywhere close to the panic created by Coronavirus. Hence, it is pertinent to draw lessons from the same. A paper by Thomas A. Garrett, Assistant Vice President and Economist Federal Reserve Bank of St. Louis gives reference to the World Bank, which says that a global influenza-like disease will lead to US$ 800bn worth of damage to the economy," the report mentioned.
Further, the the report noted that “Rush to liquid assets; emerging markets are not liquid by any stretch of imagination, so will be beaten up more." That will result in more down side. This storm has to pass before investors can scout for stocks again.