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Coronavirus: Fear Of The Unknown Grips Stock Markets

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In the normal course, when the US Fed cuts interest rates, the markets should rebound sharply. However, despite the US Fed cutting interest rates by a solid 0.50 per cent, the Dow Jones Industrial Average plunged 785 points.

 

It's been mayhem across the global markets, ever since infections increased. The coronavirus is clearly a pandemic, which can hit trade and impact sentiments. A leading brokerage firm has said that the S&P CNX Nifty companies could be impacted by as much as 5 per cent.

 

The fear of the unknown

Precisely assessing the damage to the global economy is almost impossible. Any analyst trying to guess the same, is at best only "guessing". Let's look at some interesting piece of data from China.

The Caixin/Markit services purchasing managers' index (PMI ) almost halved last month to just 26.5 from 51.8 in January. According to CNBC it was the first drop below the 50-point margin that separates growth from contraction on a monthly basis for the first time since the survey began almost 15 years ago in late 2005.

High frequency data in the first quarter ending March 31, 2020 could well slump for China. South Korea, which has seen infections spike could be another country that might see activity and output slump. In fact, even India could see select sectors seeing an impact as many companies importing raw materials from China could be impacted.

In India, six cases have already been reported and it could not have come at a worse time, especially when there is an economic slowdown. If the virus continues to spread no amount of rate cuts would be sufficient. When it is a matter of life and death, investors and businessmen are not going to be too enthused by rate cuts.

Coronavirus: Fear Of The Unknown Grips Stock Markets

The death toll in Italy has risen to 79, while infections continue to rise in places like South Korea and Iran the hotbed for infections.

The stock markets can very well understand the fear of the known, but, when you have the unknown, its difficult to take a long or short term position.

What should investors do?

At this juncture, it's best to buy in businesses that are unlikely to be too impacted by the Coronavirus. Bet on stocks that are positively impacted by the virus. For example, oil marketing companies are likely to see improved profitability, as crude oil has slumped. Some of these stocks like Indian Oil Corporation are offering a dividend yield of near 7 per cent.

A stock like Coal India has assured business prospects, with no impact from the coronavirus. This stock is again giving you a dividend yield of almost 7.5 per cent. With the US Federal Reserve cutting interest rates by 0.50 per cent and the RBI likely to follow, interest rates have fallen dramatically.

SBI now offers interest rate of around 6 per cent on its Fds. In such a situation, if you are getting a dividend yield of around 7 per cent, it is not a bad bet. Investors who have a long term perspective may gain, should the extent of infection subside.

Read more about: stock market sensex nifty
Story first published: Wednesday, March 4, 2020, 9:24 [IST]
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