The Covid-19 Pandemic Could Be A Solid Opportunity to Create Wealth 

The ongoing Covid-19 outbreak has induced negative sentiments among investors regarding the markets. Moreover, to exacerbate this meltdown, the plummeting oil prices due to demand-supply factors have plunged to new lows. As of 20^th March, this illness has caused more than 150 thousand deaths in more than 200 countries, according to the World Health Organisation’s information. This virus has brought the entire world to its feet. This pandemic is contagious, and many times have an asymptomatic carrier. Hence, it is very difficult to diagnose as it has an incubation period of around 15 days; this often leads to people transmitting this virus to others. According to experts, older people and people with the weaker immune system are likely to fall prey more easily to this deadly virus. Many pharma and research organisations are working hard to develop the cure for this virus. As of now, prevention can be called the only cure for this disease. The governments worldwide have imposed lockdowns and asked their people to observe social distancing.

From the economic perspective, the Covid-19 virus has certainly wreaked havoc even in the most developed economies. As we know, the world today is a global village and is hugely driven by globalisation. Supply chain and procurement play an important role, especially in the manufacturing sectors. Due to the novel coronavirus, the supply chain for major industries has been disrupted. For instance, the automotive industry in the United Kingdom has nearly come to a halt. Most of the sectors such as manufacturing, travel & leisure, aviation has been badly hit by the novel coronavirus. Only a few sectors are likely to wither this storm, like the food staples, processed foods, Personal care, Household products and specific Home Entertainment in the pandemic struck environment. These sectors were up due to panic buying done by people in the fight to survive in the time of this unprecedented crisis.

According to the London Stock Exchange website, the FTSE 100, which includes a list of top hundred blue-chip companies has fallen by nearly 25 per cent in the last three months. The FTSE 250 was down by nearly 28 per cent in the last quarter. The FTSE AIM All share had fallen by nearly 21 per cent in the last three months.

Despite this volatility, equity as an asset class remains one of the best options to create wealth in the long term. For instance, on 22^nd January 2016, the FTSE 100 was hovering around 5,900 and further rose to 7,585 in the last week of January 2020 despite major events like the Brexit and the general elections. Despite several big corrections, the market has always recovered and reached new levels.

Is it a good time to look forward to an asset class like equity?

While most of the investors are demoralised and panicking in the period of the global meltdown, there are a few investors who are looking to invest in equity as an asset class or equity-related instruments. The global markets have witnessed some major corrections in the last few decades such as the Asian Currency crisis in the late 90’s, the Global Financial crisis in 2008 followed by US Sovereign Ratings downgrade in 2011. The trend suggests that patient investors who remain invested through a market cycle are likely to make gains in the longer time horizon.

On the flip side, investors like to try to time the market and catch the bottom. Here they tend to commit a mistake as the bottom can only be determined once the prices of the stocks recover substantially. As per market experts, valuations are likely to be quite attractive, and companies with solid fundamentals will create significant opportunities for investors to create a position.

In addition, investors who are not sure of timing the market can go for equity pooled investments, which are extensively managed by fund managers. To manage the short-term volatility, investors can invest a portion of money in the equity funds and rest of the sum in liquid funds and then transfer small instalments from liquid funs to equity funds systematically.

The course of action for Investors

It has been said that it is important to keep calm, the storm would pass. But only if you have the courage to wither it. Make sure to have surplus money in cash for a rainy day or to pay bills for at least a year, because cash is king. Make sure you have taken care of emergency fund. The money should be invested in the market, keeping a long-time horizon. Market corrections is not a good reason to panic and selling your long-time investments. The good days are often near the darkest hours, for instance, the FTSE 100 was hovering around 4,900 mark on 23^rd March. The FTSE 100 regained momentum and was hovering around 5,800 on 17^th April.

Most of the investors try to average out the cost by continuing investing throughout the market cycles. Firstly, they get the benefit of cost averaging as they do not have to worry about timing the markets, which is a matter of grave concern for passive investors. They can invest a fixed sum periodically over a longer period for creating wealth. This wealth creation process can be expedited by investing in dividend reinvestment schemes for a longer duration and witness the power of compounding. However, there are certain investors who tend to discontinue their long-term investments in this volatility, which is not advisable if you want to accumulate wealth.

On the flip side, active investors can use limit orders to take care of the price volatility factor. Furthermore, they can focus on stocks with sound financials and good dividend pay-out history. The dividend stocks could be a smart choice to park excess funds as they have reliable business models and are undoubtedly profitable.

Another important point to note is finding the right balance in the portfolio mix, which is known as the diversification strategy. Whether it is a stocks portfolio or pooled investments, finding the right mix of securities is critical and passive investors should seek advice from financial planners.

The overall portfolio should be reviewed periodically and should be altered according to the evolving needs and goals. Also, after a significant chunk of time, when risk appetite is low, investors can turn towards government securities. Moreover, the economy has the support of the finance ministry and the Bank of England.

Conclusion

To summarise, this is a period of the unprecedented crisis caused by an unseen enemy. According to one of the greats of value investing, Warren Buffet, an investor should be greedy when the world is fearful. This step correction in markets is one of the rare opportunities for long term investors. However, seeking the guidance of a financial advisor before investing could be of big help in the accumulation of wealth in the long term.

Disclaimer

The website has been prepared for informational purposes only and is not intended to be used as a complete source of information on any particular company. The above article is NOT a solicitation or recommendation to buy, sell or hold the stock of the company (or companies) under discussion. Kalkine does not in any way endorse or recommend individuals, products or services that may be discussed on this site.