18 March 2020

What Can Equity Investors Do in a Virus Hit Market?

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What’s happening: Global stocks are delivering their worst performances since the 2008 financial crisis. Concerns of a global economic slowdown, caused by the spread of the coronavirus, has shaken investor confidence and triggered massive sell offs in the stock markets.

The US stock market has hit multiple circuit breakers. European and Asian stock markets have also seen steep declines. Globally, equities are trading in a bear territory.

What investors can do: To begin with, it’s important to understand that the decline in stocks is driven by coronavirus-induced fears, rather than factors inherent to companies. While some stocks have seen half their market cap eroded amid the wider downtrend, it’s not because the companies have suddenly become inherently weaker or that their offerings have got outdated and lost favour with customers.

At the same time, it’s impossible to ignore the current market turmoil. Against this backdrop, experts suggest some ways in which equity investors can play the sharp decline in the global markets.

Understanding the reasons for the mayhem: The coronavirus has led to factory closures and global supply chain disruptions. This has severely impacted big multinational companies that had manufacturing units in China or depended on imports from the country.

Millions globally are under some form of lockdown. Spain and Italy have imposed nationwide lockdowns, closing all services that are considered non-essential. Most governments have urged people avoid unnecessary travel and some have imposed travel bans. The airline and hospitality industries have been hit hard. As governments impose restrictions to curb the spread of COVID-19, businesses suffer and economic growth slows.

Amid the coronavirus lockdowns, analysts have reduced their global growth forecasts. The OECD cut its global GDP outlook for 2020 to 2.4%. Moody’s also revised down its global economic growth forecast from 2.4% to 2.1%.

To make matters worse, Saudi Arabia and Russia are caught up in an oil war, which has injected further volatility into the market.

How to invest in today’s highly volatile market: While the situation may seem grim, there are a number of things equity investors can do.

  • Look out for positive news: With markets being so low, there are bound to be counter cyclical rallies. And, these rallies are likely to coincide with positive news related to government actions in the form of quantitative easing programs, rate cuts by central banks and stimulus announcements. However, since the rallies may be short-lived, it’s important to diligently set stop loss orders for every trade.
  • Better portfolio diversification: Risk management techniques are more important now than they have ever been. Equity investors can consider indices instead of individual stocks, also gain exposure to other asset classes and use CFDs to play downturns.
  • Invest for the longer term: Most stocks are clearly out of the overvaluation zone, offering attractive entry points. However, apart from discipline, the current volatility needs investors to have the stomach for a rollercoaster ride. Experts suggest to remain invested for a few months, instead of panic selling.
  • Stick to large-cap stocks: Bigger companies have more muscle power to tide through tough times. Making informed decisions is of utmost importance. This includes knowing the company’s strengths, how they are performing and the measures they are taking to overcome the coronavirus impact.
  • Avoid big investments: Don’t make big investment decisions. Experts suggest to invest small amounts in a staggered way.

Most importantly, it’s a good idea to remain cautious. This may not be the best of times to get greedy, ambitious or aggressive.

The Markets Today

     

Investors will be watching European stocks today, with markets closing in the green territory on Tuesday after a volatile day.

Context: European stocks recovered yesterday after hitting a seven-year low in the previous trading session. Investors were optimistic about more stimulus plans from governments, even as the coronavirus fuelled fears of a global economic slowdown. While Italy and Spain remain the worst hit countries from coronavirus, Germany and France have started reporting a steep rise in the number of cases.

Details: After registering heavy losses on Monday, European stocks gained some positive momentum on hopes of more fiscal stimulus from governments. Central banks around the world announced monetary policy actions in recent weeks. France also disclosed plans to inject $50 billion in immediate aid to provide assistance to small businesses.

The French government ordered people to remain at home for up to 15 days, following the spread of coronavirus, while the UK Prime Minister advised people to avoid non-essential social contacts. Italy continued to report a rise in coronavirus cases, with the case-count exceeding 30,000 in the country. Spain confirmed a total of over 11,000 cases. The global total has reached 197,000 confirmed cases.

The pan-European Stoxx 600 index closed 2.2% higher, after rising 3% earlier in the session. Travel-related stock tumbled about 6% with lockdowns continuing to hit the sector. Spain’s IBEX surged 9.2%, the FTSE 100 gained 2.8% and the French 40 closed 2.8% higher.

In corporate news, shares of French company Iliad spiked 19% after reporting full-year results. Meanwhile, German automaker Volkswagen announced plans to suspend production starting Friday.

According to the ZEW economic research institute survey, Eurozone’s economic sentiment dipped to negative territory with a reading of -49.5 in March, versus +10.4 in February.

What to watch: Investors are hoping for the upward momentum to continue in today’s session and are looking forward to positive news around European countries announcing more financial stimulus to lessen the coronavirus impact. Investors also await Eurozone’s balance of trade and inflation data. Eurozone’s trade surplus is expected to be €3.9 billion in January, down from December’s surplus of €23.10 billion. The region’s Consumer Price Index is expected to rise 0.20% in February.

Other Markets: US markets closed higher on Tuesday, with the Dow Jones, S&P 500 and Nasdaq 100 up 5.2%, 6% and 6.23%, respectively.

Support & Resistances
for Today

     

market snapshot

     

Futures at 0400 (GMT)

News shaping
the markets today

     

What else to watch today

     

South Africa’s inflation rate and retail sales, Italy’s industrial new orders and balance of trade, Canada’s inflation rate, Russia’s producer prices, Brazil’s business confidence and net payrolls, Argentina’s leading economic index as well as the US MBA mortgage applications, housing starts, building permits and crude oil stocks change.

 

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