Has the coronavirus outbreak given an opportunity for investors to generate wealth?

  • April 07, 2020 11:04 AM BST
  • Hina Chowdhary
    Director, Equities Research Hina Chowdhary
    1387 Posts

    Hina Chowdhary is the Director, Equity Research at Kalkine and has an extensive experience of about 15 years in the area of Research, which includes 5+ years in Equities Research particularly.She has earned a Master of Science degree from the renowne...

Has the coronavirus outbreak given an opportunity for investors to generate wealth?

The Coronavirus Pandemic has taken the entire world in its grip. At the time of writing, more than 1.35 million people had been confirmed positive across the world, an increase of around 0.51 per cent as compared to a day ago on 6th April 2020. The United States of America, which is the new epicentre of the disease, now has approximately 370,000 positive cases, a rise of 0.17 per cent from a day earlier. The United Kingdom presently has approximately 51,608 cases, with more than 5000 people dying because of the severe illness caused by the Coronavirus. The biggest shock came with Boris Johnson, the Prime Minister of the United Kingdom being transferred to an intensive care unit, following the worsening of his health condition. Last week he was tested positive for Covid-19 and was self-isolating at his official residence.

No doubt the health concerns are rising across the globe, but the situation and containment measures have also led to an economic meltdown across the world. The governments had to impose a lockdown for the purposes of containment and the suppression of the transmission of the disease and to stop the community spreading within their borders. The lockdown meant that the industries had to stop operating while all economic activities in various countries, including the United Kingdom, got halted. The outbreak has contributed towards a large amount of businesses destruction and job losses for individuals, who have been confined at their homes, while many being furloughed by the employers. Stock markets have crashed in the last one month, with little signs of recovery in the very short term. Even the safer assets are not secure anymore, with blue chips stocks, especially from the banking sector falling to their 52-week low prices.

It is said that challenges present opportunities, and this phrase has become most appropriate for the current stock market scenario. Despite the challenges, there could be certain opportunities for investors to increase their wealth and at the same time, provide capital support for the industry. Let us have a quick look at the performance of the stock markets during this phase and then discuss the opportunities that are present for the investors and shareholders to generate wealth.

Stock Market Performance Highlights

The London Stock Exchange market saw record losses in the first three months of 2020. The FTSE 100 Index, which is the benchmark index in London, was down by approximately 24.8 per cent in Q1 2020 and was expected to go further down in the coming times, with the lockdown continuing. This was primarily driven by the liquidity crunch being faced by the treasury as well as the financial system in the country. Another potential factor was companies cutting down dividend and bonus payments to shareholders to reserve cash in this tough situation so that once operations start, they do not face challenges in obtaining or sourcing working capitals. Shareholders seemed extremely disappointed with this announcement as they were counting on dividend payments to generate income somehow. The index closed at 5772.12 points on April 6, 2020, closing out at a loss of around 10.68 per cent in the last one month itself. The story has not been very different for the FTSE 250 Index as well. The mid-cap stock index of the London Stock Exchange market has also suffered similar losses during this period and closed at 15,534.96 points on April 6,2020, a loss of 17.13 per cent in the last one month itself.

Diving a little further into this, the investors and shareholders realise that one of the most disappointing factors is the non-performance of previously stable stocks. Last time such a situation happened was just after the 2008 Financial and Mortgage crisis, which was immediately followed by the recession in 2009. Experts have suggested that the recession being caused by the Covid-19 Pandemic, would be deeper and broader in terms of its geographical coverage, meaning more countries will be affected by this recession, and hence markets are expected to plunge further.

How can investors take advantage of the opportunity being presented?

The vary basic mantra for stock price investing has always been “Buy Low, Sell High” to achieve large amounts of profits. General stock market situations rarely present opportunities where quality stocks are available at attractive prices, primarily because of speculators, who buy such stocks in large volumes driven by the long-term price trends and decent to good businesses of such stocks. This means that most of the times, the “Buy Low” part of the mantra fails for most investors.

And hence, when the stock markets reach this stagflation or recession phase, it is also a good opportunity for investors to buy stocks that are available at good valuations or are cheaper than their intrinsic values. But it is also important to note that the objective of buying these quality stocks during the tough period should not be short term and investors shouldn’t also look to trade these stocks for the purpose of short term capital gains, as markets do not present such opportunities. Investors and shareholders with patient and long-term intentions are rewarded. This is mainly because of the fact that in such situations, short term price performance is unclear to the experts as well, as it cannot be determined if the stock markets have reached their Nadir or not. It is also generally very difficult to determine the short-term downside risk as market forces that drive these prices in the short term are very unpredictable and the situation can swing from one way to another in a fraction of time, and not days. Hence, the objective of buying stocks at such a time should always be to obtain long term capital gains and hold the stocks for more than a year, because that is when price correction generally starts.

Data from the 2009 recession, suggests that price correction started only in the middle of 2010, and it took at least 2 to 3 years for complete market recovery.

Experts are of the opinion that no or very negligible growth is expected in the coming months and earnings of these companies during this period would be significantly hit. But, once this phase is over, the operations could be back on track immediately and even though there will be cost-related concerns as supply chain contracts would have to be renegotiated, especially for the larger firms, it would be a minor issue for these companies in about a year’s time. Experts suggest that if one currently has blue-chip stocks in their portfolio, they should not be in any haste to sell such stocks, and rather hold on to these shares or accumulate at attractive levels. The current market seems very bearish, but it has been generally observed that the change in the psychological stance of the investors happens in a matter of days, and any good news can act as a trigger for that. Hence, bullish markets might seem distant currently, but if investors are patient, there is a potential to generate great wealth.


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