In: Finance
The ongoing Coronavirus pandemic has sent global markets into a tailspin. We have witnessed benchmark indices globally fall by 25-40% from highs. Due to the restriction on movement there is likely to be collosal demand destruction across sectors. Among the sectors which are worse affected are Travel and tourism, energy, metals, automobiles. The sectors which are managing to relatively out perform are Pharma and FMCG.
Central banks around the globe have responded by cutting rates and injecting unprecedented liquidity. The US Fed has already expanded its balance sheet by USD 2Tn. In the absence of real investment and consumption demand, this liquidity has percolated into stocks and lifted them from lows. The Dow Jones Industrial Average has seen a recover of close to 35% from lows already.
However, there still remains considerable uncertainty around how long it would be before the economies recover from this shock. Several businesses are facing liquidity issues and if the longer the lockdown continues, the liquidity woes could morph into solvency issues which in turn could manifest itself as a systemic risk.Therefore it is advisable to have a cautious outlook on the market and stick to defensive (low Beta) stocks.