Need not panic over market crash, there's a silver lining at the end

We've witnessed a history on Friday in the stock markets with a wild swing of 16 per cent in a single trading session. It also recorded only for the second time in Indian stock markets that the lower circuit has been hit and trading was halted for a while, this is after a gap of 12 years. Finally, the stock markets have begun price-in the economic costs of latest virus outbreak.

As described in our monthly commentary, the investors started to assess the possible outcomes of the repercussions.

The virus contagion is turning to an economic or financial contagion with cascading effects unknown of triggering where and what the next domino would be of.

The social quarantine, lockdowns and travel bans being enacted by the govts could have a positive impact on the spread or pace of the virus spread but would immediately result in adverse impact on trade, travel and productivity.

As per WHO (World Health Organization), the spread of the virus has now accounted for 145 countries, and turned truly a global pandemic. What we witnessed on Friday was not the stock prices, but the human emotions which are oscillating between despair and hope.

The govts across the world have responded to this grave danger with measures to arrest or condense the economic effects through economic stimuli and packages for their nations, the real need of the hour is the coordinated effort to stall any further pain to the already struggling world economy.

So, is the market reaction on Friday morning is just a precursor to what to follow or just an overreaction to the mass hysteria that's unfolding across the world on the outbreak.

It could be both but if we closely look into the scenarios that could unravel, have severe bearing on the credit and bonds of the companies which are currently impacted directly.

This would make them difficult to weather in the strained fund raising due to the already embattled equity route prompting further distress in their financials.

The whole situation could eventually turn into a butterfly effect where a seemingly insignificant event of a butterfly flapping its wings in Brazil could lead to a hurricane on the other side of the globe.

The distress in the debt/credit markets could quickly translate to what we've seen in the Global Financial Crisis (GFC) of 2008 where there were defaults of corporates leading triggering more defaults of financial institutions and vice versa.

The central bankers have initiated an aggressive stand of infusing liquidity (along with stimuli) to prevent any situation to turn into a catastrophe.

Now, that I've spoken like all the other news that's flowing and got your attention let me tell you that for all the gloom that I'd portrayed till now, there's a silver lining at the end.

We've seen such conditions earlier too, despite the cliched 'this time is different'. The way nations have responded, the swiftness and unequivocal reaction to the unfolding disaster is unprecedented.

Only time would tell if we'd done enough of it, but with the limited knowledge available about the virus, the health workers and organizations are doing a great job of trying to contain the epidemic.

It's at these times of sweeping fear, it's difficult to stay strong and remain immune from peer pressure of retaining the portfolios that are designed for our life goals. In the hindsight, it might just be another blip in the whole journey, but to live through this is emotionally stressful.

There's too much noise and to remain sane is very challenging. We would be led to confirmation bias, etc., where we would aspire to get validation for actions, that too supposedly, being correct. We would justify each of our action but to persist being rational is defiant.

As dust settles and finally things end, the ensuing rally in the asset classes especially stocks would be so wild and manic that it would be difficult to take part in it. So, what could be done now is not to alter too much in the way investment is done. Of course, asset allocation is the key and any excesses wouldn't help the cause.

Equity markets have been always risky and volatile; it's a set rule and nothing new about it. Though, we may haven't seen this kind of intense pessimism all the time, it's normal to have this discomfort at these times. Get over it, stay strong and stick to basics of investing. Of course, follow hygiene, be cautious, eat healthy and live happily.

(The author is a co-founder of "Wealocity", a wealth management firm and could be reached at knk@wealocity.com)