VENDREDI 20 MARS 2020 BIZWEEK ÉDITION 282 LA TOUR COVID-19 : Financial Market Implications The year 2019 was another exciting year for investors amidst a stock market rally that saw the S&P 500 surge 29%, representing the biggest annual gain since 2013. Over the year, global stock markets overcame US-China trade tensions and Brexit uncertainty to post healthy gains during the year. Easing trade tensions with China, a shift in monetary policy in the US, and improving economic outlook all renewed investors’faith. Meanwhile bond and commodity prices also rose. 2020 has however witnessed a very poor start so far. In spite of the fact that potential escalating war tensions between the US and Iran were contained, the major financial markets around the globe have experienced a significant decline since the start of the year The world is currently facing a double Black Swan Event, whereby two unexpected events are being felt by financial markets. These include the Coronavirus (Covid-19) outbreak which as a chain reaction triggered the Russia-OPEC Cartel Standoff. A black swan is an unpredictable event that is beyond what is normally expected of a situation and has potentially severe consequences. Black swan events are characterized by their extreme rarity, their severe impact, and the widespread insistence they were obvious in hindsight. The intensity and sustained risk of further global spread led investors to sell equities at lower prices, hence locking in losses. This has resulted in a wide decrease in equity prices around the world. Russia-OPEC Cartel Standoff As an icing on the cake, Saudi Arabia and Russia, two of the world’s biggest oil-producing powerhouses, are currently in a standoff which has caused oil prices to fall by 43% since the start of the year. On 6 March, members of the Organization of the Petroleum Exporting Countries (OPEC), a cartel of 15 countries of oil-producing nations, met to discuss on the impact Coronavirus on the global demand for oil. During the meeting, the cartel’s leader, Saudi Arabia, suggested that the participants collectively cut their oil production, with Russia making the most dramatic cut of around 500,000 barrels a day. The reasoning behind doing so would keep oil prices higher (demand/supply economics), which would sustain the revenue for nations in the bloc, whose economies are heavily dependent on crude exports. Given concerns about their market share, the Russians opted against the plan and left the cartel. This has led to oil prices plunging as investors are worried about the future of the commodity. Market Reaction While the global financial markets are currently digesting the impact of the two Black Swan events, investors and analysts are trying to quantify the shocks, which in our view is very difficult for the time being. Moreover, some potential buyers have stepped back from the equity market while sellers, who do not want to afford additional losses, have stepped in and cashed in their positions at large discounts, resulting in massive share price drops globally. As a result, on 9 March, at the start of trading, the major stock indices in the United States fell so sharply, that the buying and selling of shares were halted for 15 minutes, a mean to act as a «circuit breaker» aimedat limiting panic selling by investors. This day was referred to as a Black Monday, the 4th largest fall in equity market since 1987. On 12 March, the circuit breaker was triggered again as the S&P 500 hit the 7% threshold decline in the morning. Later during the day, the VIX Index (which refers to the future volatility in equity prices as per investor’s sentiment), hit its highest intraday level since the financial crisis. In an attempt to sustain the US equity prices, on 03 March, the Federal Reserve Committee of the US adopted an expansionary monetary policy by cutting the US Policy Rates. Other countries such as Australia, UK and even Mauritius, have also cut their policy rates. Nonetheless, the first rate cut has not been very effective. On 15 March, the US Federal Reserve Committee again cut interest rates to almost zero and has launched a USD 700bln stimulus programme in an effort to protect the economy from the effect of coronavirus. which may not be a very good strategy. As highlighted, both local and foreign equity prices have fallen significantly during recent weeks. However, for the time being, in our view, Local Market reaction it is difficult to quantify the economic shocks given the lack Locally, our island has experienced the same trend, a of visibility and high volatility. sharp fall in the equity market followed by a cut in the policy Nonetheless, historical data has shown that the financial rate. The local equity indices however pickedup slightly on markets have always found a way to overcome the major 10 March. crisis and implement measures to address negative/bear Furthermore, later during the day, the Monetary Policy Committee (MPC) slashed the Repo rate by 0.50% to – 2000, Asian Financial Crisis – 1997, Japanese Lost Decade market cycles such as Financial Crisis – 2008, Tech Bubble 2.85%. One would now expect a drop in the bank savings – 1991, The Great Depression – 1929. A crisis can also be rate, local Treasury yields as wellas yields offered by corporate bonds. With the current high level of volatility and uncertainty in an opportunity for investors with a long termfocus. As at 13 March 2020, the year to date returns of the major the markets, investors should act with cautions. Generally, local equity indices are shown below : institutional investors such as pension funds, endowment funds, etc. have a medium to long termtime horizon and the ultimate objective is to match its liabilities, bearing in INDEX YEAR-TO-DATE (PERFORMANCE IN MUR) mind risk levels and diversification. Investors with a medium to long termtime horizon may SEMDEX -13.4% have the opportunity to recover from a fall in equity prices. Note that equity markets rallied during 2009, a few months SEMTRI -13.4% after the then sharp fall in prices due to the 2008 financial crisis. SEM-10 -14.8% Furthermore, bond yields are no longer as attractive as in the past. However, should the Coronavirus outbreak become pervasive and uncontrollable, drastic measures will be taken by Amid travel restrictions due to the outbreak of the Coronavirus, on the local side, Leisure & Hotel share prices were different local side, countries. Leisure & This may result in a further collapse in Amid travel restrictions due to the outbreak of the Coronavirus, on the heavily Hotel share impacted. prices were heavily impacted. the financial markets and have serious consequences on the Certain investors may be selling at lower prices/losses so global demand and supply chains. Certain investors may be selling at lower prices/losses so to potentially avoid to potentially avoid witnessing future price drops. Investors witnessing and future Investment Committees should closely price drops. monitor the evolution of the outbreak and the severity and mortality rate of those infected. The economic impact, es- Conclusion and Way-Forward pecially on global supply chains and the actions intended and Way-Forward to prevent and limit the spread of infection should also be In light of the above, inarguably, the recent events have had a major considered. impact on the financial markets. In light The of market the above, turmoil inarguably, has sent many the investors recent events in a panic have selling mode, which may not be had a very a major good impact strategy. on As the highlighted, financial both markets. local The and market foreign equity prices have fallen turmoil has sent many investors in a panic selling mode, Source  : Aon Hewitt Investment Consulting Team significantly during recent weeks. However, for the time being, in our view, it is difficult to quantify the economic shocks given the lack of visibility and high volatility. Nonetheless, historical data has shown that the financial markets have always found a way to overcome the major crisis and implement measures to address negative/bear market cycles such as Financial Crisis – 2008, Tech Bubble – 2000, Asian Financial Crisis – 1997, Japanese Lost Decade – 1991, The Great Depression – 1929. A crisis can also be an opportunity for investors with a long termfocus. With the current high level of volatility and uncertainty in the markets, investors should act with cautions. Generally, institutional investors such as pension funds, endowment funds, etc. have a medium to long termtime horizon and the ultimate objective is to match its liabilities, bearing in mind risk levels and diversification. Investors with a medium to long termtime horizon may have the opportunity to recover from a fall in equity prices. Note that equity markets rallied during 2009, a few months after the then sharp fall in prices due to the 2008 financial crisis. Furthermore, bond yields are no longer as attractive as in the past. However, should the Coronavirus outbreak become pervasive and uncontrollable, drastic measures will be taken by different countries. This may result in a further collapse in the financial markets and have serious consequences on the global demand and supply chains. 4