Corona virus which is termed as Covid-19 is a virus that has brought about a lot of uncertainty globally because there is no cure for the disease and has is spreading so fast in many countries. This paper will look into how the virus has affected the current market, the uncertainty it has brought about and also what are the available investments that can one make in the short term and long term.
a. Market crash
The virus has had an adverse effect on the market as a whole mostly in the stock market, tourism production, supply chain, trade in commodities and transportation. This has brought about a crisis in the market and most countries are trying to identify measures that can be put in place in order to stabilize their economies. The market is also volatile causing price changes of commodities and liquidity problem hence making it difficult for most companies to pay their suppliers, employees and bankers.
Stochastic Portfolio Theory
The theory studies and attempts to explain observable phenomena that take place in equity markets in which market structure is analyzed under strong normative assumptions regarding the behavior of market participants. Hence enabling us structure a portfolio to take advantage of the current market crash.
b. Corona virus and real economy and long term and short term investment
There is a reduction in the economic around the whole world that has resulted into countries going into a recession which has resulted to the damage of financial stability. Most of the countries have decided to close schools, universities, businesses and factories causing panic to the whole world as these has not been witnessed for decades. There are available investments in the short-term and long term despite the uncertainty brought about by the virus.
We can conclude that corona virus is a disaster that has had a great impact on the global economy and has brought about a lot of uncertainty for most economists to come up with policies about the economy as it is not easy to predict events
Investing In the Time of Corona Virus
COVID-19 is a disease that only appeared in the public’s alertness within the last three months but has created horrific damage to the world market. According to WHO they have reported that corona virus has already sickened over a million people and killed several thousand people. The pandemic has resulted in the whole world enforced closing schools, factories, and disrupted supply chain, as a result, everything stopped working, also all countries shut-down their borders and traveling without any purpose is prohibited. The whole world is dealing with the virus which is growing stronger day by day. There is a huge economic loss for thousands of businesses because governments ordered to shut down businesses as a result people staying at home to stop spreading the pandemic. Many companies have financial risks and their value getting down, the most vulnerable companies during the crisis are weak companies which just entering the market and also heavily indebted businesses which have obligations. Corona virus can be termed as uncertain pandemic that is beyond human control, there is currently no cure for the disease hence causing fear among people on what is to happen next as business currently is not as normal thus most economist are having a difficult time to predict market analysis and forecast trends. This paper looks into the factors that affect the business market the current trends and even though there is a downturn in the market, there is a place to flourish which means that you can make a profit if you have a good strategy by investing in a short term or long term business. However the most affected market is the share market as there is a great drop in the share prices and also banks have been affected adversely this has led people to react negatively expecting the worst case scenario.
a. The market Crash
Covid-19 corona virus appeared in china at the end of December 2019 is declared as a pandemic by the world Health organization (WHO) on march 12 since it has spread to so many countries and caused a lot of deaths. The virus has affected the whole world in socio-cultural and in terms of commercial context. Some of the sectors that have been seriously affected by Covid-19 are tourism, trade in commodities, production and transportation.
The stock markets of many countries do not act according to the efficient market hypothesis and tend towards the behavioral finance theories. Due to the increasing deaths due to the virus the stock market has also been affected adversely as investors are not considering it as the right to invest in the stock market there is also an emerging crisis both financial crisis and covid 19 crisis.
Difference between financial crisis and Covid -19
Financial crisis: these is whereby there is insufficient cash flows to service interest expense, because of timing difference hence liquidity crisis or poor business, i.e., insufficient cash generated to pay interest solvency crisis
Government response to financial crisis
Even though the banks gave out excessive credit, governments are forced to rescue them during the financial crisis because too many businesses are reliant on the banks.
Economic recovery will be slow because the businesses that had over-expanded due to excessively cheap credit had to shrink back to sustainable size.
Covid19 crisis: Unexpected, sudden shut down of cash flows for reasons unrelated to viability of business or capital structure.
How the governments are responding to corona crisis
Most countries have taken financial and political actions having an aim of stabilizing the economy for example Group 7(G7) that is Germany, Italy, France, Canada, United Kingdom, United States and Japan had an agreement to work together by finding the necessary political actions that will reduce damage to global growth.
Reduction of interest rates for instance the US Federal Reserve cut it interest rates due to the corona virus crisis so as to issue loans at favorable interest rates and other countries followed and implemented the same through the central banks.
Other measures include buying of government bonds so as to maintain liquidity in the market these has been witnessed in the bank of Japan. The liquid funds are targeted mostly to firms that face a break in production hence their supply chain has experienced a large decline in demand.
Although a country like Europe is facing some challenges on t is how they can get instruments that can measure in a timely manner the cash flow decline caused by the virus at the level of firms and how to channel funds to individuals, firms and banks that have been affected by the virus.
Stochastic Portfolio theory
Therefore we can use Stochastic Portfolio Theory (SPT), which began in 1995 with the manuscript “On the diversity of equity markets”, which eventually appeared as Fernholz (1999) in the Journal of Mathematical Economics. Since then SPT has evolved into a flexible framework for analyzing portfolio behavior and equity market structure that has both theoretical and practical applications. On this case of corona virus we can therefore focus on the theoretical methodology of this portfolio as it provides an insight that questions the market behavior and arbitrage, and can be used to construct portfolios with controlled behavior under quite general conditions. SPT is a descriptive theory, which studies and attempts to explain observable circumstances that take place in equity markets in which market structure is analyzed under strong normative assumptions regarding the behavior of market participants. By using the stochastic Portfolio Theory during this season of corona virus we can assess the behavior of different markets asses where we can invest in and take advantage of the market crash, such as turning to country markets that Covid- 19 is relatively low and invest there.
Using the portfolio structure most investors can choose to invest in the gold market currently that is seen as safe haven in all financial markets. Internet business can also be a market where investors may also choose to invest in such as investing in crypto currencies such as Bitcoin which is a financial instrument used all over the world. Also as a way to minimize risk investors should also consider turning to derivative products which maybe a right option.
Macroeconomic variables such as trade openness, unemployment and GDP are normally not measured on a daily frequency hence making it difficult to reveal the relationship between these variables and Covid-19. Where the pandemic continues new models will be created taking the variables into account so as to be able to provide important economic findings on the market to the policy makers.
b. Corona virus and the real economy
Having a large number of people infected with the virus in countries such as China,Korea, Italy and Iran since the year 2019 has resulted in people having a perception towards the pandemic hence changing how they live daily. The economic activity in the world has reduced hence leading to recession in most countries and done there is damage in financial stability. The scientists are in search of a vaccine which has not been found yet hence preventive measures have been created by several governments to avoid necessary contact with the people infected.
The economy has been affected adversely as currently most factories, businesses; schools have been closed completely which has caused a lot of panic that has not been witnessed for decades. The stock market has been affected and many people are afraid to invest currently due to the fall witnessed in the market. The supply chain is also affected as well mostly relating to goods that are normally imported from china these results to shortage in production and distribution channels hence manufacturing of items such as mobile phones ,Car parts and other products cannot be done as usual.
Service industries such as hotels, tourism, and travelling, mass events have been affected as most of them are locked up no revenue generated as there are no activities going on and resulting too many people losing their jobs.
The real economy and firms have been affected by the virus majorly as it has brought about a liquidity problem in the world where there is full of information and perfect financial markets. The firms that face liquidity challenges due to the interruption of the virus may quickly face a solvency problem once their inventories and cash reserves have been depleted. Other firms will face bankruptcy or default if they don’t have ready access to funding. For example in Europe the main creditors of firms are banks hence they need to allocate a provision for loan loss and this may lead to deterioration in their capital adequacy positions. For example in Italy banks have started to grant moratoria on their loans this is so that they can provide a relief to their corporate clients to avoid a high chance of default. According to the market response it seems erratic but it reflects uncertainty over the problem and the effectiveness of government’s response. Some of the things that may be considered is the dramatic complete shutdown of the economic life so as to flatten the curve of infections to avoid the health systems from been overwhelmed. Hence according to Boot (2020) if you compare the 2008 financial market crash and 2020 the corporate sector has been affected largely and the impact is rising on a daily basis as there is a lot of interconnectedness of manufacturing and distribution in the whole world. These leads to the economic activities been interrupted leading to firms and banks having liquidity problems that may later result to insolvency.
We can also see that cash flows have drastically reduced these results to companies having a challenge to make payments to their suppliers, employees, bankers even if the underlying business model of affected firms may be in doubt. We can say that corona virus is an interruptive event that has induced fall in production as opposed to an interruptive event. If medication for the virus is found and it disappears or dies out naturally it means earnings are likely to get back to normal.
Despite the virus affecting the economy adversely there are opportunities where investors can invest in various businesses that bring income both in the long run and short run.
Short term investment – Video gaming
Home-stay entertainment that is very popular among young people staying at home is video games as most students are at home under lock down thus video games will keep them busy while indoors. Investing in these part may bring some good income since, the video games is basically a software which does not requires high inventory and cost of goods part of the business model structure. We can therefore say that it is a good sign to invest in the short-term.
We can observe that from the various existing business and according to the recent barrons’ statistics the number of users of the game named “Honors of King” surpassed 100 million people at the Lunar New Year in China. This is in comparison to the average 60 million users per day. And this trend is more likely to continue since corona virus prisoned millions of people at home, especially college and university students – the target audience of video game industry. So, Ten cent Holdings and Net Ease – companies that are in video game business showed the highest positive fluctuations during the last period among Chinese stocks. According to barons’ Ten cent traded 26 times 2020 expected earnings and Net Ease at 18 times. So, this kind of intuitive thinking and flow of logics lead us to forecast a further growth in their earnings.
Long term investment- Online teaching
The corona virus pandemic has brought about uncertainty in the world and also investors can be able to learn and take advantage of the opportunities that are currently arising. One of the opportunities seen is investing on online live streaming platform where teachers can teach through the platform and each class can accommodate upto 100000 people. Most of the developing countries have closed school due to the pandemic and putting their education as at a standstill since there are no adequate online streaming platforms where students can continue with their studies. The system can be developed in a way qualified teachers can be trained on how to use the online platform and can always be available in case students need them. There can be also internal courses instead of relying on third party materials. These is a good long term investment as most schools will be interested in adopting the online teaching model to safeguard themselves in future in case of a pandemic that may arise.
We can observe that according to Tashanova (2020) we can see that the Stock price of Chinese online live streaming education company GSX Techedu have recently increased sharply. Its fourth quarter financial report showed that GSX Techedu’s revenue increased by 413 percent year-on-year to 935 million yuan (133 million US dollars), which was 12 million US dollars higher than market expectations. In terms of profit, net income increased by 657 percent to 174.5 million yuan (US dollars 25 million). Under non GAAP conditions, net income increased by 617 percent to RMB 197.8 million (US dollars 28 million), and the revenue per ADS was US dollars 0.10, which exceeded market expectations. For the whole of last year, GSX Techedu’s revenue increased by 432 percent and non-GAAP net income increased by 1021 percent. (Source: Financial World Website). These high-speed growth data explain why GSX Techedu’s stock can soar by more than 300 percent after listing in June last year, even under many negative factors such as Sino-US trade friction, tariffs, slowing Chinese economic growth and the outbreak of the coronavirus. In the last quarter, the total number of GSX applicants increased by 290 percent year-on-year to 1.12 million, and the non GAAP gross profit margin increased from 68.3 percent to 79.7percent. Since December 2019, the stock price of GSX showed an obvious sharp increase which might be due to the outbreak of corona virus. In the long term, there is still more room for GSX Techedu to rise in the future. Now GSX Techedu’s price-earnings ratio is only 8 times, and the market trend might be implying that this stock might be still undervalued. GSX Techedu might be a good investment opportunity for investors who are interested in online education industry.
From our findings we can conclude that corona virus is a global pandemic that currently has affected the economy mostly the stock market due to its uncertainty long run and short. From the historical recovery of disasters according to Gurio (2008) in many cases, Gross domestic product bounces back just after the end of the disaster, as predicted by the neoclassical growth model following capital destruction or a temporary decrease in productivity. These disasters are also substantially reversed, because the average growth in the first two years after the disaster is over 30 percent. The problem with confidently extrapolating from past disasters to Covid19 is that the virus has not destroyed any physical assets so there is no rebuilding phase which would drive up the Gross domestic product. Although it’s not easy to predict the outcomes of events there are still opportunities where one can invest in the run
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