When the going gets tough, governments and central banks get going. That’s the message that came out of the global financial crisis and it’s being repeated in the COVID-19 pandemic. In the words of Jim Bianco, CEO of Bianco Research, reacting to the shock and awe unleashed by the United States Fed: ‘It is difficult to find a superlative to describe what the Fed announced this morning. At first blush, it looks like they are nationalising financial markets, except for equities and high yield.’
Comrade Trump is all set to follow that up with a massive support package for American workers. The impact it will have on the fiscal deficit? Who cares? Won’t the central bank interventions, particularly on forbearance of loans, lead to moral hazard? Who gives a damn? Isn’t monetising the fiscal deficit the terrible sin that all economists have warned us against? Well, in the Eurozone, they are now discussing just that, under a central bank programme called Outright Monetary Transactions (OMT). In Spain, they have nationalised their private hospitals. Don’t forget that during the financial crisis, the UK nationalised several banks. In India, the government is putting into place a massive social security programme for 80 crore people and we took the opportunity to speculate whether it’s an opportunity for setting up a universal basic income scheme in the country.
Of course, we’re not really becoming socialist. All that this means is that when it comes to the crunch, ideology goes out of the window. The task at hand is for the system to survive and policy makers will do whatever it takes to win this war.
The realisation that the world is not coming to an end seems to have dawned on the markets, with the Dow Industrials getting out of bear territory on March 26, just when we were thinking that markets had lost their faith in central banks. Indeed, US equities brushed aside Armageddon-like jobless claims, an indication that confidence is returning to the market. They also dismissed the steep falls in output indicated by the Flash Purchasing Managers Indices. Indeed, markets across the world are off their lows. But all that government and central bank policies can do is mitigate the impact of the lockdowns. That is very necessary, but any recovery in the economy will depend on how soon we can defeat the pandemic. And let’s not forget that we very likely have a bone-crushing recession ahead of us -- Moody’s has slashed its estimate of India’s GDP growth this calendar year to 2.5 percent.
In India, we’ve been banging on about the need for a stiff dose of economic stimulus. A support package is all the more necessary for vulnerable firms that were little better than zombies even before the coronavirus crisis hit. The steep fall in the market has made matters worse. Markets have been very illiquid and this has led to a lot of distortions, especially in exchange traded funds.
The 21-day nationwide lockdown, while necessary, has brought with it its own set of problems, including in the financial sector. Thankfully, the government lost no time in announcing some relief measures aimed at ensuring the poorest had enough to survive. It failed to meet our high expectations though and we lost no time in asking for more.
The Reserve Bank of India (RBI) promptly answered our prayers, unleashing a tsunami of liquidity in the money markets.
It goes without saying that investing in these volatile markets is not easy. Nevertheless, we persisted in spotting opportunities for you, figuring out what is it that makes companies do well during a recession. We checked whether investing in companies that have high dividend yields makes sense in the current environment. And we tried to answer the question whether it would it be better to invest in companies whose promoters and managers are buying in the crash.
These are difficult times. But we must not lose hope. As Albert Camus wrote in The Plague, ‘Once the faintest stirring of hope became possible, the dominion of the plague was ended.’