The Covid saga has open timelines. Economic activity is under lockdown. Stock markets are functioning. This unusual setting throws investors a peculiar problem.
We now know that economic growth in 2020 – 21 is likely to be minuscule, with visible risks of even turning negative. But, the global financial system will counter growth risks with liquidity and policy initiatives. These should translate into benefits over the long term.
But, the markets continue to trade discounting three things- the duration of the lockdown, the impairment of earnings, and the risks of firms surviving. While good firms with robust financials will beat the odds after the lockdown lifts, weaker firms can’t afford an extension of the lockdown for too long. Firms with already impaired financials run the risks of facing solvency worries. Firms with high fixed costs are unlikely to be able to withstand several months of low or no business activity.
Our markets are clearly in a state of fear trying to decipher Covid impact on individual companies. These fears will recede only when lockdown lifting is imminent.
A production deal among global oil producers will definitely calm market nerves and set up a gradual improvement in sentiment. Markets will nervously await the end of lockdown and more positive news.
This wait can throw some very interesting investing opportunities at us. Investing in select areas during this phase of fear should be adequately rewarding.