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How much more can the stock markets slide?

By Samie Modak
February 29, 2020 09:14 IST
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The answer to that depends on whether the globe is able to contain the virus spread, says Samie Modak.

Indian markets dropped three per cent on Friday amid a global sell-off in equities due to the economic uncertainty triggered by spread of the coronavirus.

Indian markets have dropped seven per cent in the past one week.

Some global markets have slipped into correction territory.

The big question facing investors right now is how much the market could slide further.

The answer to that depends on whether the globe is able to contain the virus spread. Global brokerage Morgan Stanley has listed out three scenarios on how corona disease 2019 (Covid-19) impact the economy. We assess how it will play out on the markets:

Scenario 1: Containment by March: The virus outbreak is contained by March end and production activity in China normalises around mid to late March, limiting the disruption to 1Q20 (March quarter). Global growth dips to 2.5%Y in 1Q20 (from 2.9%Y in 4Q19), but recovers meaningfully from 2Q20.

 

Market impact: The recent sell-off will prove to be a good buying opportunity. Stocks around the globe could rebound.

Scenario 2: Escalation in new geographies, disruption extends into 2Q20 (June quarter): New cases continue to rise in other parts of the world, before peaking by May end. The disruption extends into 2Q20. Global growth averages just 2.4%Y in 1H20, but picks up from 3Q20.

Market impact: The markets recovery will get prolonged. Stocks may not bounce back in a hurry.

Scenario 3: Persisting into 3Q20 (Sep quarter), escalating recession risks: The virus continues to spread into 3Q20, encompassing all the large economies. China faces a renewed rise in new cases as it restarts production. Disruption continues into 3Q20. Global growth stays weak between 1Q-3Q20.

Market impact: This will prove to be damaging to the corporate profitability. It could increase the corporate default risks. Global central banks and policy makers will have to take 2008-like measures to shore up global growth. Stock market correction will be long lasting.

Morgan Stanley believe the second scenario is the most likely and Covid-19 will only make a temporary dent to the economy and the markets.

“From the perspective of evaluating the global business cycle, we view Covid-19 as a transitory, exogenous shock as opposed to an economic slowdown which is caused by endogenous pulls and pressures of an economy that is overheating and fundamentally challenged. We remain of the view that the recovery is being delayed but not derailed,” the brokerage wrote in a note on Friday.

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Samie Modak in Mumbai
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