Aspects to Consider During a Pandemic
People around the world are paying close attention to how the recent black swan event, COVID-19, is affecting the global economy. From the end of December 2019 to March 2020, COVID-19 has spread from Wuhan, China to the whole world. This outbreak of COVID-19 not only spreads physical sickness worldwide but also brings economic disruption. Thanks to globalization, thousands to millions of passengers travel across continents by air and by sea every day, which accelerates the spread of COVID-19. Meanwhile, the misjudgment of WHO of COVID-19 in the beginning lessened the awareness of this fatal virus. This report is about what has happened and will happen in the future in financial and economic aspects.
Financially, passive global consuming confidence has led to a global earthquake in the stock market. Initially, when the outbreak of COVID-19 was centralized in Asia, a large amount of capital fled out of the Asian financial market and was pumped into the U.S. and E.U. stock market. However, as the COVID-19 expanded to the other side of the globe, the meltdowns in those financial markets followed. Many major stock markets, such as the E.U. stock market, the British stock market, and the Hong Kong stock market, have tumbled in the past few weeks. The meltdown in the U.S. stock market triggered the circuit breaker mechanism four times in a month, which forced the Fed to come up with a rescue plan to slow down the fall in the stock market and prevent the panic to spread from the financial industry to other industries. On March 3rd, the Fed announced that it will lower the interest rate by two yards, and on March 15th, the Fed reduced the interest rate by additional four yards, which has led to a new low point in recent years. The Fed hopes that the low interest rate in the U.S. will attract more capital to the U.S. and help prosper the U.S. economy.
Relative to similar pandemics in the past, such as the SARS outbreak in 2003, the global economy has become more interconnected, and China plays a far greater role in the global supply chain, trade, tourism, and commodities. For instance, China accounts for four times the world GDP compared with 2003, and its contribution to world GDP is 1.7 times greater than it was in 2003. According to the OECD, the global GDP growth rate in 2020 would be 0.5% lower than anticipated. The outbreak of COVID-19 has forced many Chinese manufactures to prolong the Lunar New Year vacation and to shut down the factories for almost two months. This series of manufacture shutdowns have led to a domino effect, which is not expected to bounce back in the short-term. The subsequent outbreak of COVID-19 in other countries, including South Korea, Japan, E.U., and the U.S., many countries have started to practice travel restriction and close theit borders while some cities even asked their citizens to stay in quarantine. With the shutdowns and quarantine policies, many companies are required to slow down their regular paths and many companies even suffer from the shortage of inventory. Many small and medium companies in the supply chain, which do not have enough cash liquidity, may start not having sufficient funds to pay off their debts may then start facing bankruptcy.
Suggestions to Investors:
As the stock market is now in the red globally, it is a great opportunity for individual investors to get into the game. However, recognizing a promising subject is extremely essential at this moment, as many companies with low cash liquidity may not successfully survive the COVID-19 if the situation is not under control in the short-term. Hence, before investing in the stock market, it is important to read through the financial statements and make sure the company has enough cash to get it through the COVID-19.
We hope everyone gets through the COVID-19 crisis healthily!