The current market situation is triggered by a combination of the following events
- Corona-Virus pandemic in Italy (Spreading to Europe)
- Saudi Arabia & Russia unable to agree on Oil Production Cuts
The implication of the above events imply a sharp drop in productivity & tourism as countries go into lockdown (or containment, restriction of movement, whatever you call it) with fears of a global recession.
At least on the surface, that is what it looks like
The reality is that speculators are using the current negative market news as a reason to shortsell the market.
Shortselling is a speculative way of trading whereby traders borrow to sell a stock they do not own now, and buy it back again at a later date. They would make a profit if the stock price is lower.As most players are adopting a wait and see attitude at the moment, there are more sellers then buyers, leading to sharp decline in prices.
With airlines reducing or grounding their fleets & countries entering lockdowns, demand for Oil is at an all-time low. As such, productions need to be reduced to maintain prices. Saudi Arabia & Russia are likely making use of current situation to target the US shale oil production companies.
The shortselling will continue until the institutional investors such as GIC or Temasek step in. Various Governments around the world have already declared measures to limit shortselling, lower interest rates and begin/restart Quantative Easing (a.k.a printing money) It will take some time before the effects can be seen.
For countries with weaker capital reserves, recovery will be long and painful.
Some facts on the Covid-19 Virus
- Very contagious, can spread during incubation
- About 70% of victims will suffer flu like symptoms
- Older victims with pre-existing illnesses are especially vunerable to virus
- Proj 2.1% - 3% fatality rate (SARS was 10%, MERS was 34%)
It will be a long drawn out fight, at least until weather turns hotter during July August Period. (Typically diseases spread during colder climates) A genuine risk here is that if some countries do not play their part well, it can undermine the efforts of other countries.
What to do now if your portfolio is currently down underwater?
Look for opportunities to switch to holdings that have higher recovery potential. Also, do have your reserves made ready to top up if you find a great bargain price.