Despite
the pandemic’s devastation being more severe than the September 2008 crisis,
the recovery has been swifter
With the
benefit of a rear view of nearly a year since stocks plunged to multi-year lows
as nations prepared to down their shutters, the global medical emergency has
offered valuable insights into markets’ stumble and rebound. The crisis
differed from past blowouts in two ways. First, the magnitude of the
devastation. There was no benchmark, sector or stock that was not swept away by
the tidal wave of selloffs. While the Nifty’s 59% loss was spread over 10
months to beginning November 2008 amid the credit crunch, the index shed 34.5%
in two-and-a-half months to 3 April 2020. Second, the suddenness with which
investors were caught unawares. The Nifty was trading at a steady level of
12,200 for two months to mid-February 2020 before it started losing ground. There
were sporadic, but alarming, reports about the breakout of a communicable
disease that had prompted China to put an entire city under lockdown. Yet the
potency and scale of spread of the deadly virus, which was so mysterious that
for many days was known after Wahun from where it originated, was not something
that had been anticipated. There were contrarian voices during the dot-com boom
warning about the sustainability of the eyeball-based valuations and during the
home mortgage madness about the dangers of exotic spliced-and-diced debt
instruments. Even the beginning of the end of a cyclical bullish phase has
enough red flags for those concerned about prices running ahead of historical
earnings growth. Covid-19 was horribly different. There was no roadmap to
vanquish an invisible opponent who seemed omnipresent and resilient. There was
no knowing how long the war would last.
Nearly nine
months later, the situation had changed for the better, with vaccines from six
different sources in use and more on the anvil. The issue occupying much
bandwidth is if the recovery is too fast and too soon. The Nifty rebounded to conquer
its January 2020 peak in over seven months after the 23 March dive in contrast
to the two years it took from the January 2008 milestone. The journey from the
brink to back was not easy. There were restrictions on movements. Supply and
distribution chains were disrupted. In the post-covid-19 world, certain ways of
living had altered, either permanently or drastically. In the process, new stars
were born, some got a fresh lease of life and others a second coming. The steps
leading to the re-emergence from the turmoil comprised fear, rescue,
differentiation, search for the next big idea and return of risk-taking. The
conditions leading to the seizing up of liquidity can be mismatch between
revenue inflows and valuations of Internet properties at the turn of the
century, miscalculation of the direction of asset prices during the period of
low interest rates in 2007, or disarray in production and reach of goods and
services last year. The redeeming feature of the latest scary event was the
exemption of essential services such as pharmaceuticals, polymers and
fertilizers and the discovery of the indispensability of tech. These sectors
attracted idle money and rekindled investor interest.
With the
wisdom of how keeping the lending pipeline de-clogged aided recovery post the financial
sector meltdown over a decade ago, central banks quickly loosened supply of
no-cost money. Without any too-big-too-fail institutions to rescue to limit the
contagion from infecting other healthy parts of the economy, governments
resorted to direct cash transfer. In India, vulnerable sections, with the power
of lifting other segments of the economy, were identified for support. Assured
of a safety net, companies, on their part, cut costs and concentrated on
keeping production running. The search for better returns during a period of
negative interest rates had two consequences. Picks were not based on headline
numbers. The scrutiny turned to niches and specialties. Makers of two-wheelers
and farm equipment, insecticides, and health and hygiene products found fancy within
their industry. The confidence to embark on the next risky bet, with the
comfort of liquidity limiting the downside, resulted in a shift of attention
from growth counters to value stocks, temporarily thrown out of gear. Renewal of
buying in metals, infrastructure, capital goods and real estate coincided with
the phase-wise lifting of lockdowns. If proof is required that the wheel has
completed its rotation is crude more than doubling in 10 months to cross US$ 60
a barrel after hitting a bottom and estimates that central banks will likely tighten
money flow as early as in H2 of 2021 instead of 2022. It had taken Federal
Reserve seven years to lift interest rates from zero after September 2008.
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