Two important developments globally - the spread of the Covid–19 virus and the meltdown in oil prices - have affected market sentiment and contributed to the high volatility and decline in the global equity markets, including India.
The market is concerned with the spread and the impact of the Covid-19 (Novel Corona Virus). The CBOE Volatility Index (VIX), a measure of volatility in equity markets tracked widely has been at multiple year highs and has been extremely volatile itself in the last couple of months. The Indian equity markets have been experiencing extreme volatility in the last few weeks. This volatility is reflective of the conditions in global markets.
The full impact of the virus on society and its consequent impact on the economies across the world remains largely unknown. Governments across the world in the United States, Europe and Asia have announced fiscal and policy stimulus in a bid to mitigate the economic impact. These steps are currently unable to calm the financial markets. The fears, in our assessment, will subside once the governments get a better control – on both the spread of the virus as well as progress in finding cure / vaccine.
For India, the real economy has taken a hit with shopping areas, malls and parts of manufacturing shut down. These steps are essential to retard the progress of the epidemic so that it can be controlled. However, this will hit businesses, esp. small businesses, and those who depend on them. Consumption demand will be impacted at least for a quarter. There is likely to be some need for forbearance on loans as businesses are undergoing stress. The banking system will have to support industry during these challenging times.
Oil prices have added to the volatility in global financial markets. The moves by Saudi Arabia-large price discounts to its Asian customers and threats to increase production in a bid to defend its market share, have unnerved the oil markets and oil prices are hovering at 18-year lows.
For India, the huge correction in oil prices, if sustained over the next few quarters, can potentially provide significant fiscal headroom to the government to boost consumption as well as govt expenditure in the economy.It is estimated that a $10 per barrel decline in crude oil prices on an annualized basis reduces CAD by about $15 billion or 50 basis points of GDP. A $10 decline in crude oil prices increases the fiscal headroom by $1.9 billion (approximately Rs 14,000 crore) due to reduction in cooking fuel subsidies.We believe that the markets may continue to be volatile till the infection is under control globally. Valuations in Indian equity markets have become attractive on the back of recent market corrections. The 12-month trailing Price to Equity (P/E) and Price to Book (P/B) Ratios are at multi year lows.
However, we believe, investors should invest in a calibrated and staggered manner. They can make use of tools for staggered investments like Systematic Investment Plans (SIP) and Systematic Transfer Plans (STPs).Typically, SIPs allow disciplined investing that helps build an investment corpus over a long time period. Systematic Transfer Plan (STP) is yet another option which can be used in such volatile market conditions. We urge the investors to contact their financial advisors and do a thorough need and goal-based investment planning as there are ample opportunities in current market conditions.