Understanding the Economic Shock of Coronavirus

The coronavirus outbreak, which has put the global economy under a lockdown, is being compared to the 2008-09 downturn.

The economic turbulence caused by the COVID-19 outbreak has revived memories of the 2008-09 global financial crisis (GFC): recession chatter, bloodbath on global stock markets, governments and central banks loosening the purse strings. 

The pandemic, which has claimed thousands of lives across continents, has virtually brought the world economy to a standstill with millions of people placed under lockdown and global supply chains thrown into disarray due to the virus wreaking maximum havoc in China — the world's factory.  

While many are already comparing the current crisis to the 2008-09 recession, most experts do not expect it to be as bleak and are forecasting the global economy to swiftly recover in the second half of the year, provided the outbreak fizzles out by then. Economies across the world are already experiencing a significant contraction in economic activity that will likely last through the first half of the year. JP Morgan economists predicted that the U.S. economy would shrink by 4% in the first quarter and as much as 14% in the second quarter, while the economy of the 19 nations using the euro would contract by 15% in the first quarter and 22% in the second. Economic activity will start to expand again in the second half of the year, they said—even sooner in China, which they say will see growth in the second quarter of 2020 as life there starts to normalize

"The 2008-09 crisis was far more severe because the global financial system was far more fragile. Banks were not as well-capitalized as they are today. While today there are concerns with rising nonfinancial corporate debt, I'd say the magnitude is not as severe as in 2008-09." 

Global economy 

The collapse of US lender Lehman Brothers in 2008 fueled the most painful global economic downturn. Millions of jobs were lost, hurting global consumer spending. While the current crisis could cost the global economy up to $2 trillion this year, according to UN estimates, it's still not expected to push the world into a contraction.   

In my view this is a much more temporary shock that is going to have less significant and longstanding negative impacts on the global economy than the global financial crisis.

It's not that as if you don't go out today because you're worried about catching the virus, the money that you didn't spend today will be saved forever, it's more likely to be spent in the future unless something dramatic changes...When you look at past episodes of virus outbreaks or natural disasters, you know typically discretionary spending returns at a later point.     

International trade 

The coronavirus shock could not have come at a worse time for global trade which has been reeling from trade tensions between the US and China, the world's biggest economies. But the current blow is still not a severe as the one dealt by the crisis 10 years back. 

"The global financial crisis was kind of endogenous in the economic system meaning that there was a strong capital stock distortion in some countries and there was a problem of over-indebtedness. These two roots of a crisis are much harder to cure than the situation that we are facing today where we have an interruption of production structures, which in principle are fundamentally sound," Stefan Kooths, head of forecasting at the Kiel Institute for the World Economy.

So, even if the coronavirus crisis leads to a deep meltdown in terms of production, the chances of getting out of this recession rather sooner than later are much better than in the global financial crisis.

Coming back home

Refer the image below you will observe that after every set back the bounce has been big fast and higher. 

The economic growth has been bigger. Those who has remained invested in this period has enjoyed multifold growth on their investment.

Lets take some example

• See how markets recover after every crisis situation. If you had invested Rs 100,000 at the lows of Swine Flu panic in April 2009 then it would be around Rs 2,10,000 by November 2010.
• Similarly, if you entered the market around the lows in January 2016 when the Zika virus gripped the market, it would turn your investment into Rs 1, 50,000 by October 2018.

Time is the best healer.

Stock Markets reward long-term patient investors

Your investment today must be showing a de-growth of 20 to 25%. A worrying time certainly. So what must we do at this time.The least you can do a sit tight and do nothing. This will pass. 

The best and intelligent action would be to invest maximum in the next 4 months for a handsome returns in coming 5 yrs.

Sensex Annual returns 1991-2018

Why ? above chart is self explanatory. And there are many live examples from past crisis who have profited millions. These smart investors are not again investing for next wave of exponential profits.

It is extremely likely that five years from now we will all be looking back at this time as a great buying opportunity.

We don't know if this panic is going to get worse, and we never know in real-time whether the panic is going to be the once-in-a-generation kind, but if we were to take a leap of faith looking at how China has recovered, we do know that it is extremely unlikely. Nearly all panics wind up being "mini-panics" in hindsight, and they also turn out to be fabulous buying opportunities.

It is important to buy the right businesses that will stand the test of time. Several businesses that are around today may not be around in the next 5-10 years and could lead to further destruction of wealth.

Sometimes people think, it's prudent to buy a stock simply because it has fallen from 1000 to 400 without recognising the fact that stocks can practically go down to zero as we have seen in the case of Jet Airways, RCOM, DHFL, etc over the past few years.

Can you make those profits ? YES. You just need to connect with a advisor.

Those who keep calm, patience and accumulate a basket of well-diversified products will emerge healthier wealth wise in the long-term.