5 April 2020
Keeping
markets open signals continuity and liquidity infusion restores confidence in
the nation’s currency during disruption
Doubts that a flat world have only benefits without any downsides
have been permanently put to rest after the havoc caused by the covid-19
pandemic. The credit crunch nearly 12 years ago was the first signal that if
global supply chains facilitated ease of doing business, they could also
dispatch pain. The source of the problem might be a single country but the
casualties do not remain confined to its boundaries. The cheap money made
available by the Federal Reserve found its way into risky assets not only in
the US but even in emerging economies. The drying up of liquidity after many
American home buyers stopped servicing their mortgages threatened the survival
of several smaller nations as well as companies outside the US that had felt
emboldened to borrow heavily to finance their growth. When the Fed reduced the
lending rate to zero and embarked on a bond-buying program after the collapse
of important financial institutions, central banks in many other countries
including the European Union followed. Once again monetary
authorities are slashing lending rates and extending credit lines. Fiscal
packages are being formulated to support businesses facing disruptions in
sourcing raw materials and transporting goods as countries around the world
self-isolate.
The outbreak of the severe acute respiratory syndrome in 2003
infected over 8,000 and killed 800 people in 26 nations. It did not lead to any
government or central bank to come out with stimulus. Neither was travel
restrictions imposed. Practising quarantine to control the earlier epidemic,
however, has now become a model to contain the spread of deadly diseases.
Similarly, keeping financial markets open even if stocks and bonds suffer a
severe rout is expected to become a template during future calamities. Indices
tumbling to multi-decade lows and bonds with higher coupon rates finding no takers
even as interest rates plummet might be an alarming situation. But no policy
maker would want to signal pessimism. Rather the message is of continuity.
Stocks are allowed to digest the impact of the event and move on. Circuit
breakers give participants time to reflect if their reaction was appropriate or
harsher than merited. The duration of halt is specified. At a time when digital
technology allows trading from remote locations and seamless clearing and
settlement, providing investors an exit route as well as an opportunity to
enter to indulge in bargain-hunting is the best course. For one, there is no
clarity who should decide on a shut-down: the government, the exchange or the
regulator. A consensus might be difficult to arrive on the parameters to
determine when the storm has blown away. A problem of not switching off order
terminals is price manipulation. Volatility is difficult to avoid when the
crisis is fluid and so is the response to tackle it. Most market watchdogs
select the easy option of banning sales without possession of securities,
particularly when the market’s decline is relentless. The objective of
imparting stability obstructs portfolio churning by offsetting losses with
quality stocks at low valuations. India treaded the sensible middle path. Margins
have been hiked in the cash market and so also market-wide limits for taking
positions in the derivatives segment. Even such interventions are frowned by
those who believe that short-selling is as legitimate an activity as taking
long position.
Besides
deriving comfort that markets will work even during grave threats, another
significant outcome of the current turmoil is the popularity of cash transfer
to the affected or lending it at practically no cost. It emboldens risk-taking
at a time there is danger of paper money losing its relevance and assets such
as gold gaining currency for bartering. Of course, the post apocalypse world
will not be the same as it was before. Airlines never regained luster after the
September 2001 terrorist attack on the US. The transformation underway in some
industries due to technological obsolescence or change in taste will hasten.
The result might not be what was anticipated. Cars, whether run on petrol on
electricity, will not matter if work-from-home catches traction. The dot-com
bubble burst at the turn of the century and stamping of expiry date on patents has
knocked off the brand premium of tech support players and pharmaceutical
products. Financial institutions tagged as too-big-to-fail are under increasing
scrutiny to avoid a relapse of the September 2008 seizure. Whether malls, multiplexes, retail outlets,
automobiles, restaurants, hotels, fashion brands and airlines will be the
casualties of social distancing will merit close attention. The winners will be
digital properties connecting with consumers.
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