COVID-19: Stock Markets will ‘wait and watch’ for 1 week

Markets wait to see if US can control COVID-19 like China did

Stock markets extended their losses on today, with the Nifty 50 falling by around 2.5% to 8,967.

Among the biggest drags were ICICI Bank, which fell nearly 9%, indicating that large, foreign portfolio investors are exiting their long positions in the market.

With this, the Nifty 50 index is now down 27.5% from its all-time high struck in mid January.

FIRST WINDOW CLOSED

The current valuations of the equity markets, whether those of India or the US, reflect much of the information that is available about the ongoing COVID 19 infections and their impact on economies worldwide.

Infections across the western world, including the US, Canada and Western Europe, are galloping at a fast pace with no signs of any slowdown.

Current valuations reflect the fact that the US and Western Europe have not been able to get a grip on this infection in the early stages, and that the virus will ravage their economies as it did that of China.

In other words, the first window of opportunity, bringing the virus under control before spreading, is now seen as having been closed, and the 30% cut in equity valuations reflects that.

SECOND WINDOW NEXT WEEK

The next trigger for the markets will come in another 6-7 days, by which time it would be clear if western countries are able to tap the second window of opportunity as far as slowing down COVID-19 is concerned. This is the window that countries like China and South Korea successfully tapped.

While the first window was all about trying to prevent a mass breakout by controlling isolated cases, the second window is more about managing the economic fallout by restricting its geographical reach. This can be achieved either through aggressive ‘social distancing’ measures, or artificial means such as better treatment, vaccination and so on.

While Asian countries like China, Japan and South Korea successfully brought the infections under control after the initial spurt, the big question is whether western countries will be able to — and the markets will get an indication by early next week.

At present, expert opinion is divided between those who believe that western countries will manage to arrest the geometric progression of the infection, and those who believe that what was done in Asian societies cannot be repeated in western societies.

The second category believes that the damage inflicted by the virus on western economies will be far more than what was the case in Asian countries because of innate cultural differences between the East and the West.

They point out that Asian cultures are more community-oriented, where people are taught to think more of the group or community than about themselves, while western values emphasize individual survival.

As such, social distancing — which requires individuals to make sacrifices for the sake of society as a whole — may not yield the same degree of success in western countries, they argue.

US President Trump and British Prime Minister Boris Johnson have already indicated that they expect the virus to ‘wash through’ their countries over the next 3-4 months.

The British PM, on Thursday, indicated that his government would focus on building up ‘herd immunity’ by allowing the virus to infect a large number of young people, who are not at the risk of sustaining complications from the virus.

Trump, meanwhile, said yesterday that he expects the virus to ‘wash through’ the US through July-August, an indication that he too does not have much hope of containing the infection as was done in China and South Korea.

While the markets, as they stand now, have already absorbed the impact of a China-like disruption on the US and EU economies, what they have not planned for is a situation in which practically everyone in these countries goes through a cycle of infection in a two-month period, resulting in potentially millions of deaths.

If, by next week, it becomes clear that these countries are on course for practically unchecked proliferation of the virus, the markets are likely to correct another 15% or so.

If, on the other hand, these countries correct their courses and put in aggressive isolation and social distancing measures, the markets are likely to start recovering from the sharp devaluation seen in the last two weeks.

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