During such times, the number one thing that investors like us should avoid is knee-jerk reactions.
Just a few months ago we wrote about how global growth was expected to increase to 3.4 percent in 2020 from 3 percent in the previous year. Little did we know what lay in store in 2020.
The coronavirus outbreak has taken the entire world by surprise. Its economic and financial impact is yet to be measured and felt. The International Monetary Fund (IMF) on March 24 changed its global growth outlook for 2020 to negative, forecasting a recession as bad as or worse than the 2008 financial crisis. This is the first time that the entire world has united against a common enemy and indeed globally coordinated measures will be needed to fight this foe.
As life across countries comes to a grinding halt, both individuals and businesses are likely to be economically affected.
Businesses that operate in sectors that are directly impacted by lockdowns, such as tourism and entertainment, face an existential crisis. Whereas, MSMEs that have taken debt to fund operations might struggle to stay liquid as inbound cash flows are impacted. This inability to service loans will eventually affect banks’ stability as well.
Such a scenario is not restricted to one or two countries, it is likely to play out in almost every affected country. Hence to support struggling individuals and businesses, a coordinated global fiscal stimulus programme needs to be undertaken.
The stimulus can take the shape of a government-led increase in spending, direct transfers or a reduction in taxes. The key to a successful programme is open communication and knowledge-sharing between governments. The leadership of a global organisation like the IMF is essential during such uncertain times.
Further, along with government coordination, there is also a need for central banks to work together to support demand and ease financial conditions by ensuring the flow of credit to the real economy.
Investors have removed nearly $42 billion from emerging markets since the beginning of the crisis. In India, selling by foreign investors pushed the rupee to an all-time low of 76.15. Similar losses were suffered by other emerging market currencies such as the Indonesian Rupiah, Thai Baht and Brazilian Real.
Central banks will need to work together to provide emergency swap lines so that there is enough liquidity in the currency markets. Central banks in emerging economics will need to ensure timely foreign exchange interventions and address capital flow reversals.
Governments must realise that even though locally implemented solutions might temporarily solve the problem, unless the entire world comes together to overcome the coronavirus challenge, countries and their economies will remain at risk.
During such times, the first thing that investors should avoid is a knee-jerk reaction. In my opinion, investors who have uninvested cash are in a great position. Companies with solid business models are available at significant discounts. Such investors should look to capitalise on this opportunity.
This is also a great time to buy into new asset classes. Almost all asset classes have dropped significantly in price. For example, if someone was looking to diversify internationally and invest into US-listed stocks, current levels provide a great opportunity to enter into the market. Such an opportunity might not come again.
(The author is CEO and Co Founder at Vested Finance.)Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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