Whether the market will go up or down in the coming weeks, months or years – is not the question I would be able to answer you – but it is, indeed, evident that some businesses (airlines, travel, etc.) are facing detrimental consequences as a result of coronavirus outbreak, thus there is a reason behind the market value erosion in these businesses.
Coronavirus has knocked the capital markets with tough turbulence. Given the large uncertainties around COVID-19, it has become more complex for uninformed investors to understand, and free-falling markets across the board are reminiscent of these facts.
Besides, major capital markets across the globe were hanging at the highs prior to the correction. When you sit at such high levels of optimism around the market, the pullbacks are likely to be of great magnitudes.
At this juncture, there are some very important factors you should consider:
Record low interest rates
In the US, monetary policy rates are now around the levels seen during the pre-hike era. US Fed hiking cycle lasted between December 2015 and December 2018, which made the US treasury bills relatively attractive.
At the backdrop of rising interest rates, the US dollar strengthened further — stemming its place as a strong and highly transacted reserve currency. Also, we should note that, in addition to interest rate hikes, the markets were steering amid the oil price crisis back then.
Now that USD is backed with low interest rates, it could be expected that other currencies have room to run against the USD, and emerging markets could be one of the beneficiaries of weaker USD.
When the risks of coronavirus ease, the risk-assets have a lot more room to march higher, given that we have:
- cheaper cost of capital,
- low interest rates,
- opportunity costs in holding US treasury bills,
- large fiscal policy responses from policymakers across the globe,
- major monetary policies close to the inflation target,
- and low energy prices — generating deflationary pressures.
De-escalation in the US-China trade disputes
US-China trade dispute had been one of the major uncertainties plaguing markets over the past years, and a trade truce by the two largest economies around the world by the end of the last year was well received by the markets – resulting in all-time highs and high returns.
As the repercussions of coronavirus fade in the near-term, you are likely to hear more from the US and China officials on the phase two trade deal, but the trade developments are here to stay for some time – as countries are reorganising their trade habits.
US Presidential elections
Perhaps more deadly than coronavirus, the outcome of the US Presidential elections is likely to be a catalyst for markets in the second half of the year. Most of the investors have completely ignored the potential magnitudes of sentiment turnaround, which could be caused by outcomes of the US Presidential elections.
Popular democrats have plans that could easily drown the markets — including taxation, healthcare, competition and more. Last week, on Wednesday, we saw the way US markets reacted in optimism when Joe Biden was reported to be ahead on Super Tuesday.
It was just a teaser of the markets’ sensitiveness to the potential US election outcomes, and you will see the full movie in the second half of year. Hence, you may expect more thrill as we head further to the US Presidential election year.
Negotiations between the EU and Great Britain, with more to come
Another catalyst in the December 2019 market rally was the finalisation of Brexit. It cleared a lot of air since it was confirmed that Great Britain is set to leave the European Union.
Business uncertainty has come down significantly over the recent past, but you are likely to see more implications in the near-term. The European Union and Great Britain are working to strike a trade deal between them, and it would uncover many winners and losers.
It is not only the European Union, the UK Government Officials also are going to have a lot of work in the near-term, as they develop new trade strategies and negotiate trade terms with a major part of the world.
As far as Australia is concerned, being a Commonwealth Nation, it is likely to get some preferential treatment by the policymakers sitting at Downing Street, UK.
Potential stabilisation in the global economy
Assuming that there was no coronavirus, you must have been emphasising on the latest earnings show by the companies and evaluating your course of action for 2HFY20/1HFY20.
It was looking great, the global growth expectations resonated some optimism backed by low interest rates and less uncertainty. There were hopes of a pick-up in economic activities across the board.
Considering that coronavirus disruptions would impact economic activity for a single quarter, with impacts being felt at different periods across countries depending upon on the level and timing of outbreak – the bounce-back could be quick but spread across different time periods.
You are likely to see fiscal responses from governments around the globe, of which, the targeted responses by the policymakers are likely to be favourable for industries and segments that are having the most damages.
Pick-up in demand to lift oil prices
Emphasising on the supply-side equation of oil prices seems extremely uncertain right now, but demand-side fundamentals are somewhat predictable and less uncertain when compared to supply side.
With the current level of oil prices having the propensity to force high-cost oil producers out of business, oil businesses must be looking to safeguard balance sheets at the moment through capacity reduction.
A material lift in oil prices is likely to be driven by incoming demand from the nations that are resuming to normal activities post coronavirus logjam. However, as the coronavirus is making way into new countries, the demand from such countries could be at risk.
Coronavirus is not the end of the world!
At the outset, the fears and uncertainty around the virus would pass. We would need more advancement on the healthcare side of the coronavirus, which is likely to have material consequences to markets.
Researchers would become more acquainted of the virus, and the process of inventing the vaccine is likely to improve. Also, you should consider that the researchers are in a race to find cure for the pandemic of a new century.
Besides, we are living in 2020 not 2003 (SARS), whereby we are growing human capabilities as well as technologies that could deliver on the expectations of the world in formulating a cure for the virus as soon as possible.