Just wanted to note down some thoughts on the possible impacts of the current Coronavirus pandemic and the resultant global market crash. I am not an economist, neither a political analyst but merely an observer of human and system behaviour.
Supply chain
optimisation likely to incorporate redundancy and failover
The current
global supply chain is optimised based on cost and time. That is manufacturers
tend to get their components or parts built in places where it is cheapest t
produce and ships it to the factories just-in-time. With a large-scale pandemic
like situation, which comes right on the heels of US-China trade war, large
(and small) corporates will rethink their supply chain and dependency on China.
They will now need to build in inventory costs as the supply chain would need
to factor in redundancy and supply disruption constraints. This will, in turn,
increase the cost structures and reduce margins. Some industries, like
electronics, which ran of wafer-thin margins, may find it very difficult to
survive or will need to take price hikes.
Move from globalisation
to localisation may get accelerated
The last few
decades had seen an unprecedented wave of globalisation with free movement of
people and products. This is increasingly facing headwinds as resistance builds
up in local communities leading to economic and social strife. The rise of the
right-wing globally and Brexit are manifestations of these social shifts. As
more business shifts inwards, global companies will need to have a better local
presence in countries they wish to do business in. Second-order impacts may
include a decline of tax havens and higher taxes for global companies as they
would need to pay taxes for profits in each individual country they operate out
of.
New work culture
building up
Working from
home was prevalent in only a few industries like IT. With a lot more people
getting used to working from home, it is likely that more companies will realise
that they can actually run their businesses when employees do not come to one
centralised office. This is a very profitable move for companies as they would
be able to reduce expensive office space, maintenance, electricity and other
such costs. Second-order consequences are too many to list here but a few
prominent ones are negative sales impact on auto, petroleum, real estate prices.
Shorter-term it would also have a negative impact on all crowded places like
restaurants, shopping malls, movie theatres.
Ecommerce likely to
get a boost
Online sales
have already started getting bigger and is likely to expand much further once
more and more people hesitate to go out in public places like crowded shops and
malls.
Government &
Central Banks have limited options
Respective
governments and central banks essentially have two policy actions that they can
use – fiscal and monetary. That is, they can tinker with taxes, government
expenditure and interest rates. The issue is you cannot fix a supply-side issue
with a demand-side solution. That is, if you are running say an automobile
factory and don’t have the necessary supply of engines from China, then
reducing interest rates will not solve your problem. This is the same reason
why when food inflation shoots up, you can’t really do much by cutting rates,
simply because the food is just not there. Similarly, neither does cutting
taxes, both corporate and individual, help in any way. What these measures do
is to price the risk in the market. With reduced interest rates, central banks
(and governments) push the people to invest in riskier assets or fuel
consumption or both. The last option that the government has is spending out of
this problem. Government expenditure has the potential to create employment,
provide a sense of security to corporates and basically spur the economic
engine to start working once again, with the hope that it leads to a positive
spiral of higher consumption and sustained growth coming back.
The Indian government
gets a Godsend as crude prices collapse
India, as a
major crude importer has just received a Godsend with crude oil prices
collapsing due to the fight between Russia and OPEC (Saudi). The government
finances are in a mess with no money to spend at all. With this fall in crude,
the government can potentially use the money saved and channelize into
infrastructure development. There are large areas where India can and should invest
in for future global competitive advantage. Now is the time to get into those
areas like green energy, increasing healthcare facilities, schools, colleges,
railways, airports, inland waterways, ports, defence. The list can go on.
China is in a
precarious situation
China is a
very insulated country. But rumours are that the banking system in China is
under stress and the coronavirus has only exacerbated the situation. Unless it
can demonstrate that it has been able to successfully contain the outbreak and
are getting back to normalcy, they will be the biggest sufferers as the global
manufacturing supply chain will readjust and leave them behind. This will have a large long term impact on the social and political situation in China. But with
an authoritarian government in place, it is likely that China will be able to
show the resolve required to quickly get back to normal.
First global crisis
in the age of social media and fake news
This is
perhaps the first major global crisis in the age of social media. Social media
amplifies and distorts messages, so the impact of people is very different from
when all media was state-controlled or influenced.
Flight of capital to
safety
There is a
flight of capital towards safety and security. Unfortunately, in India, last 2
years has seen multiple critical situations in the banking and financial
sector, one of which is currently underway. This has severely eroded the faith
that investors have in banks. With a possibility of further rate cuts from RBI,
bank deposits will become more unattractive. IN such a scenario, gold and US
dollar tends to do well.
Investment horizon
reduces during crashes
Market
crashes have a way of reducing our time horizon from decades or years to weeks
and days. If an investor just sticks to thinking about the underlying
businesses and how they can get impacted by the change in the context, and
maintain the long-term horizon, it will perhaps help in reducing the stress and
anxiety.
Better to stick to
your investment plan
All crises
finally come to an end. This too shall pass. And when there is a global
crisis, governments tend to take coordinated action. I would be very surprised
if we do not see significant quantitative easing (reduced interest rates) and
other policy measures announced by governments across the world.
So, fasten
your seat belts and enjoy the ride. After a few years, you will probably tell
the next generation of market participants, “Heck! I lived through that!”
