COVID-19: The Impact of a Pandemic on Global Stock Market

BY: Swapnil Agasty

The Indian stock market was giving a very uncertain response to the capital market since many of the investors were decisively dependent on various indices

The novel coronavirus or COVID-19 pandemic has held far reaching consequences beyond the spread of the disease and the efforts to quarantine it. As the virus is spreading around the world, the concern has also increased towards the total supply chain as well as the unprecedented crash in the Sensex and the Nifty 50 (National Stock Exchange).

Although the Union Budget announced by Finance Minister Nirmala Sitharaman on February 1 was the beginning of the drop as many investors had lost their faith on the policies introduced, the global market started falling from January 17, 2020.

The Indian stock market was giving a very uncertain response to the capital market since many of the investors were decisively dependent on various indices from the US, Europe and the Asian markets such as DOW Jones International Index, Germany’s DAX as well as Singapore’s SGX Nifty.

The first strike from the pandemic’s scare was on February 28, 2020, where the Sensex had a fall of 1500 points and there was a cumulative loss of investors’ wealth amounting to around 5.5 lakh crore rupees. This was also because of the trigger on February 27 when DOW Jones fell 600 points and the rupee also had fallen to 72.27 against the USD.

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All the banks were severely hit when HDFC Bank, one of the prime triggers in Nifty 50 index (and the leading stock of Nifty Bank Index) registered a drop in its share price from 1200 to 1170 in a single day. The pandemic’s influence was so high that the price dropped to as low as 740 (38%). The same was also the fate of ICICI bank, which dropped from 525 to 495 on February 28 and so far reached as low as 275 (47%).

The investors have reacted in what looks like a rational way since human-to-human infection was confirmed on January 20 by the World Health Organisation (WHO). This was also seen when iShares MSCI China ETF went down 11% along with the US airline sector being off 7% and Brent oil (a global benchmark of MCX) was down 13%.

Nifty started falling from February, 13, 2020 and it had a consistent drop till March 24, 2020 from 12250 it dropped to about 7500, which is a drop of 4750 points (38%). If we compare it to the previous financial crisis of 2008, the NIFTY dropped 4150 points (64%) from 6400 to 2250 points.

However, we must also consider the fact that it is just the beginning as far as the pandemic scare is concerned and it might drop even further. Moreover, the 2008 fall happened in a period of eleven months but the present plunge has happened over 6 weeks only which is an unprecedented event in the market.  In the meantime, the fall was also supported by the Organisation of Petroleum Exporting Countries (OPEC) who reportedly ‘scrambled’ after the steep decline in the oil prices due to the lower demand from China. The biggest trigger is that the fear factor in the market is going up. The fall has also been too-fast-too-soon and as witnessed, the Asian market has also plunged.

When we try to look at the reasons, we must remember that stock prices are driven by corporate profits. So, the expected global economic slowdown due to the fast spread of the Corona Virus and an attendant drop in earnings is the biggest reason. When it is expected that the profit in the recent quarter is going to get a slump due to all obvious reasons, a steep drop in the capital market is not abnormal.

Risk factor is also a reason for the crisis. Investors on the slightest hint of any risk in their capital intend to square off their buying positions which result in the fall as far as the value of stocks are concerned. There has been a growth in the number of mutual fund companies who are a large contributor to the FIIs and the FDIs of the capital market. These companies tend to pull out their investments in a risky scenario and up to a certain extent can be considered a trigger in the fall. This cannot be negated since they are left with an answerable risk factor and their performance on the same is dependent on how they manage the risks involved.

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Deglobalisation is another factor to be kept in view with respect to the recent fall due to the pandemic. All the nations have started practicing lock down since it arguably seems to be a prime solution for the growing CoViD-19 disease. Upon doing so, nations have closed their international borders and that is definitely going to make an impact on the development of all companies performing in the stock market. We, the nation of prime income on out sourced mechanism, will definitely be affected by the wide spread lockdown. Same will be the case of many other industries since development in the market is a global effort and lack of sourcing of various components will be the prime factor of the slowdown.

To conclude, this is not a very good time to predict or expect the economy to have a recovery anytime soon. With the spread of the Corona Virus increasing day by day, it will be very hard to predict if the Nifty will have a further drop to a historical slowdown or will the Government as well as the Reserve Bank of India be able to find an appropriate solution to contain the increasing panic concerning CoViD-19.

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