Question

Year-to-date 2020 we have seen dramatic collapse of financial markets globally as economies have struggled with the "one-two punch" of the COVID-19 pandemic and the OPEC-Russia oil wars.

1) To what extent could investors be protected from these events impacting the performance of their securities portfolios? is there any protection when events are global in nature?

2) How do you anticipate these events will impact the cost of capital used by firms to evaluate their capital budgeting projects?

3) How long do you believe it will take for financial markets to recover their losses? what actions will be needed if we are to realize a faster recovery?

Answer 1

1) To what extent could investors be protected from these events impacting the performance of their securities portfolios? is there any protection when events are global in nature?

The very old technique of diversification of portfolio is the only way an investor can protect investments. However, when an event is natural and unexpected in nature which is never been encountered before it is hard to tackle by the nations to overcome from the distress. The protection is handed to only selective sectors via stimulus packages but these are no help to an individual investor to protect their portfolios. When a financial crisis takes place the investors usually pull out money from money markets and invest in commodities such as gold and other precious metals which are highly valued.

2) How do you anticipate these events will impact the cost of capital used by firms to evaluate their capital budgeting projects?

Undoubtedly the cost of capital for firms during this time increases. The projects are evaluated with high cost of capitals since there is lack of cash in the economy due to investors idea to protect their funds. Even if the funds are available to company, they are extremely expensive to fund a project. The government however provides a lifeline to some sectors by providing cheap funds to protect the companies from being bankrupt or fund their projects.

3) How long do you believe it will take for financial markets to recover their losses? what actions will be needed if we are to realize a faster recovery?

Financial markets during this time take a huge plunge or sometimes are highly volatile for a certain period of time. The financial markets these days are close to being efficient which captures most of the information quickly. In such a situation, the market always waits for a good news to recover like for example, the market is heavily relying on the development of vaccine to recover from the COVID-19 crisis. The markets may have started showing some recovery due to this crisis but they persist to be highly sensitive and volatile. The governments can introduce newer policies, relief packages or pump in money into the economy in a controlled manner to walk towards the path of recovery from this crisis.