A Sudden Crash in the Stock Market – is It Time to Panic or an Opportunity to Invest?
The way market has crashed in the last couple of days, especially today on 12th March when the Sensex tanked over 3000 points in a single day, registering its historic fall, everybody has a feeling if the end of the world is near!!
Unlike the crash of 2008, the reason this time is not economic but a notorious new virus (Covid-19, popularly known as Corona Virus) which is creating havoc forcing the countries to close their boundaries. As more and more countries are taking the steps with each passing day and the numbers of fatalities in Europe and America is increasing, the stock markets are reacting negatively and all the world markets are taking a hit. The Virus which started spreading mainly in China in Dec’19 did not show much effect until the end of Jan’19 when it was restricted to China but as soon as in Mid-Feb’ when the rest of the world started having the infections in their own country, things suddenly took a very sharp turn. The situation turned from ‘not too bad’ to ‘worst’ overnight and the panic does not seem to stop for another 2-3 weeks. On 11th March, the USA restricted visitors from any European Union countries (except UK) to enter in the country and many other countries are following the same suit.
With over 115,000 infections to date all over the world and over 4,000 deaths (out of which over 90% are in China alone) due to this Virus, the nos. do not seem to ring a panic alarm of such magnitude. But in the past couple of days, while China (and its neighbors like South Korea) has managed to contain its further spread drastically, Europe, America and rest of the world are now feeling the immense heat as nos. of infected persons have suddenly sprung up and rising in geometric progression. But a slight relief is that it’s not deadly for persons of good immune rather they may not feel any effect more than the normal flu. The risk is higher amongst people of weak immune system, elderly (over 70 years) and people with underlying health problems.
In these already tough times, the falling oil prices fuelled the panic further. Considering the negative effect of Virus on industrial growth in China and thereby the lower demand of fossil fuel in the near term, the OPEC had to agree on the cuts in production. As Russia denied taking part in such an arrangement, infuriated Saudi Arabia did not take it lightly and decided to do the opposite by ramping up its production by another 20% instead. The price war on Oil caused the oil to fall down to 1991 levels of USD 30/barrel which would eventually render the shale oil production unfeasible for America. While America will suffer on account of these low oil prices, India and China would be the biggest beneficiary of this fall and would be able to save considerably on their foreign reserves.
The Indian stock markets would have actually be benefitted with the crashing oil prices, but the effect of falling markets across the Globe (mainly on Corona) did not give any chance of it and then India Stock Markets had come across another problem in this period. One of the largest private sector banks of the country (5th Largest with a balance sheet size of over Rs. 200,000 crores), Yes Bank, failed miserably and now struggling for its revival. Though the problem of this bank was going on for past 1-1/2 years as it was unable to shore up the additional capital during this time, RBI suddenly decided to take over the Bank and put SBI in forefront to tackle the issue by investing in the Bank. The timing of this incident along with Corona-effect was hard to digest again for the market, so mayhem was inevitable and the stock market fall like a pack of cards and suddenly this meltdown has become a bigger problem than Corona Virus itself. People are now saying ‘You are not at risk – if infected, you are at huge risk – if invested’.
So why after all this, we should still feel confident and continue to invest in equities:-
- All the problems listed above are either temporary (though could last for 6-12 months in worst case scenario) and would be resolved;
- Government has been proactive in taking tough measures whether against Corona or in the issue of Yes Bank, which will help further to clean up this mess quickly;
- Though production as well as consumption in China as well as the other worst-affected countries, may keep the demands low for certain Indian industries (mainly Auto sector and export industries, etc.), there is nothing to worry about overall economic situation of India;
- The economic growth rate of India has already come below 5% for now and expects to remain subdued for another 1 year or so, but it won’t remain at that level forever and expected to revive by next year.
Considering all that, we can safely say:-
If you’re investing for the next week, today is terrible news.
If you’re investing for the next year, it’s probably not much in the way of news.
If you’re investing for the next decade or more, it’s wonderful news.
So keep investing !!