Impact of Covid-19 on Dalal Street

What is COVID 19?

 

 

 

 

 

Coronavirus disease (COVID 19) is an infectious disease caused by a newly discovered coronavirus that originally started from China in November. According to WHO, older people with pre-existing conditions – such as chronic obstructive pulmonary disease or asthma, high blood pressure, diabetes and heart disease – appear to develop serious illness more often than others, while a U.S. health official said the mortality rate in males appears to be twice that of women in every age group.

What are the economic effects of COVID 19?

While the sociological and personal impacts are quite easily observable, we would like to discuss some broader economic or financial impacts which are pretty evident:

• The stock markets are in free fall and there is no particular logic as to why investors are losing their money in the markets (of course we have speculated some ‘causes’)

• Interest rates are being reduced by all the Central banks all around the world

• GDP growth forecasts are being decreased by the rating agencies on a Global level

• Certain sectors like consumer durables and airline industry are getting more affected (badly) than others

However, Why are the stock markets falling?

Stock markets have been falling simply because investors don’t like uncertainty and therefore they have been selling. Investors are also worried about the falling oil prices.

The main reason which we are speculating for the fall are:

Inadequate Investment

Industries are not investing, given the uncertainty of the situation. The main reason that industries that are facing the brunt of ‘lock down’ is because of their inherent characteristics. Industries like consumer discretionary, financial services, airlines etc are dependent on business cycles and the strength of the economy as a whole.

OPEC not halting their production.

The reason why OPEC has decided not to stop its production is because of the ongoing price war between USA-Russia-Saudi Arabia. Somewhere in March, OPEC decided to cut its production of oil due to weak demand forecast amid the corona hit global economy. However, Russia did not respond well to this production cut and decided to rather increase its oil supply in market, leading to a free fall of the oil prices. The speculated reason for this is that Russia wants to hamper the US oil sector (based on shale technology) and create a stronger foothold in the market. Moreover since Saudi Arabia did not want to lose its market share to Russia in ongoing price war, it too decided to increase its oil production leading to a further fall in oil prices. These measures produce a gloomy situation where supply is abundant but not supported by the adequate demand. Moreover, the continued supply by Saudi Arabia creates a big possibility of negative oil prices.