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Should you be too pessimistic about the economic impact of Covid-19?

Friday 27, 03 2020
The risk of having a global economic depression currently has been fully included in the prices of stocks by investors.
Should you be too pessimistic about the economic impact of Covid-19?

If possible, look on the bright side

The current situation is not too grim

The foreign exchange is recovering due to the fiscal stimulus plan of 2 thousand billion USD that has just been approved of. This plan is established after the worst week in the history of the Dow Jones Index and other exchanges in the world.

The risk of having a global economic depression currently has been fully included in the prices of stocks by investors. The Chinese GDP is estimated to have reduced by 12% in the first 2 months of the year, which could be a sign of depression.

However, if possible, people should try to look on the bright side. Epidemics are sure to cause tremendous losses, however, the death rate due to the Covid-19 epidemic seems to be lower than the initial forecasts.

What are the economic impacts of the border-closing policies required to maintain a low death rate? Until now, there have been more negative impacts, especially those on the stock exchange, that stem from the negativity attitude than the actual damages.

The Baltic Exchange Dry Index, which is the average price index of raw material aquatic transportation, is the best clue that reflects the global trade in real-time.

It plummeted to the bottom in February and ever since has been improved as the epidemic crisis in China develops more positively.

Should you be too pessimistic about the economic impact of Covid-19?

If 2008 saw a demand failure, Covid-19 is causing a shock in both demand and supply. At least by now, it has not become a banking crisis, thus allowing corporations to hope that they could rely on banking credits in addition to governmental bailouts.

The economic effects of the epidemic vary between nations. Specifically, the impacts on the stock exchange have been more serious for value stocks.

Companies owning these value stocks attract investors with dividend payment, as they are major companies such as airlines or financial enterprises, instead of the high development potentials.

Comparing to growth stocks (stocks of companies that have the growth potentials, such as technology ones), such companies tend to have a lower stock exchange price per income ratio.

The graph below illustrates different sectors and their average PE ratio in the blue columns. The sectors on the left, including aviation and financial ones, are value stocks.

Those one the right, including technology and healthcare, are growth stocks. The red columns show the impacts that have happened to the average stock prices, or in other words, they show how low have the stocks dropped by.

Overall, it is clear that the stocks of growth industries have the least amount of price reduction. This is unusual as in an economic crisis, investors tend to rely on value stocks.

This shows the light at the end of the tunnel, which is the fact that companies that are expected to generate growth, such as Amazon, Google, or Facebook will, in fact, do exactly that.

the economic impact of Covid-19

What should the world do?

Governments and central banks have responded timelier than in 2008, but some sectors still require more assistance than others.

Countries need to encourage banks on loaning and flexibly taking advantage of the extremely low interest rate. Many people are calling this crisis a “black swan” incident, meaning that it is an unpredictable disaster that is causing major economic difficulties.

However, such an epidemic was expected to happen in 2017, yet it did not. Thus, policymakers may use the data from the old crisis to plan for the upcoming ones in the future.

Companies should learn from others who have gone through the crisis with the best outcomes and turn those experiences into a part of their values.

The world is in a deglobalization state at the moment. Companies must adjust their supply chain and markets to self-protect.

This means that the more they focus on the domestic market, the better it will be, creating a new and safer balance between localities and in the world after the epidemic ends.

Planning for different potential outcomes of the crisis may not be beneficial. It is better to be resilient, as well as to respond to and focus on current events.

​>> Bloomberg: 4 gloomy scenarios for the global economy because of Covid-19

Source: ​

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