The entire world is at a war against COVID-19 pandemic. Globally, the magnitude of the negative impact is so huge that some experts have indicated it’s going to be even worse than “The Great Depression” witnessed from August 1929 to March 1933.
Global scenario
As the fear of the global economy moving towards a recession grows, it is likely that there will be a liquidity crunch coupled with high inflationary pressures. The conditions accordingly are unlikely to improve till 2021, with an expected $2 trillion shortfall in global income and a $220 billion hit to developing countries (excluding China).
In the given circumstance, it is imperative to take careful budgetary activities, both preventive and remedial, to guarantee the general monetary wellbeing of an individual. At regular intervals, traded on open market organizations report both their real budgetary income and their normal possibilities, in near future. However, for investors, the test is two-fold i.e. foreseeing when that bounce back will come, and picking which stocks will win or lose, when it does. Since the stock market investment crested three months back, tech mammoths have fared well. Retailers are not the organizations have endured as customers remain at home, yet those taking into account home-bodies are flourishing.
The aftermath from the pandemic has made new open doors that natural development pioneers are best ready to catch. By putting more in their pool of advancement ability, giving these individuals the scope to take advantage of these lucky breaks, and empowering reasonable dangers, these development heads will expand their lead further. Organizations are moving quicker and facing greater challenges than could have been envisioned a couple of months back. A further catalyst to re-evaluating built up and lumbering advancement approaches is the quickening of numerous patterns that are as of now in progress. The lock-down has presented a move to on-line work practices and group sharing stages while making new chances.
Local scenario
The COVID-19 virus can be expected to infect developing economies like Pakistan. The classic transmission of exogenous shocks to the real economy is via financial markets as they become part of the problem. As markets fall and household wealth contracts, household savings rates move up and thus consumption must fall. Pakistan was already experiencing rough waters before COVID-19 pandemic struck. Equity markets were already seeing a decline due an economic slowdown, bond markets were seeing an influx of money due to high interest rates, which were kept high to combat inflation, on the other hand making it costly to venture into new businesses with debt financing. Debt had reached 68.8% of GDP. However, Rupee was at a stable position against dollar, mainly due to the contraction in CAD. Forex Reserves were enough to cover 3 to 4 months’ worth of imports. As the COVID-19 pandemic is spreading, so is its impact on the financial front. Equity market (PSX) has tipped and turned, while forex reserves have declined by a massive $1 billion. On the external financial front, the debt servicing payments will soon be due. Fiscal deficit will only grow in days of crisis where government is giving stimulus and the revenue collection is to be compromised as well. With exports falling and remittances slowing down, debt servicing cannot be financed solely by import saving. Loans are to be renegotiated and new loans are to be solicited to provide for the fiscal space government needs to get out of this crisis.
Pakistan’s economy is projected to face a loss of up to 4.64 percent in GDP because of disruptions in trade, both in imports and exports after the outbreak of COVID-19 pandemic. This could be roughly quantified to around Rs700 to Rs800 billion losses in the April-June period of FY2020 if the exchange rate in terms of the dollar versus rupee is estimated at Rs165 against the dollar.
The major reason behind this unfortunate decline in output is the fact that, out of the five major trade partners, i.e. China, USA, UK, Japan, and Germany who have more than 50% share in trade with Pakistan. Are to be the worst hit countries by the COVID-19 pandemic.
These estimates do not include the effect of an internal slowdown or shutdown, which when factored in would amplify the supply shock estimates.
Stock markets
With stock markets correcting by over 30 percent due to the pandemic, their portfolios have lost a huge portion of wealth and there seem to be no signs visible of recovering those losses in the near-term with a possible global recession becoming more real. And it’s not just the stock markets that have been hit. Conservative investors would also have to settle for fewer returns going forward as the returns on Fixed Deposits (FD), Recurring Deposits (RD) and other fixed-income assets have already gone down and it is expected that interest rates are going to be lower in the times ahead. In such a scenario, many investors face the question of what they should do with their savings now. Should they hold on to cash or should they invest? If yes then where to invest?
In terms of investing in these times of crises, one should ask oneself, am I on the right course as far as my long term objectives are concerned? Can I get advice from a team of reliable and experienced professionals?. One needs to be careful as adverse movements in interest rates may jeopardize the portfolio objectives. So, at this juncture, it makes immense sense to stay at the short end of the curve that is short term products, like short term bond funds, banking and PSU debt funds. These products have a maturity profile of two years to three or four years and the price impact of a rise in rates would be quite limited. The benefit of higher liquidity usually accrues to the short end of the curve and therefore, that is the preferred region. With a trajectory of growth and inflation highly uncertain, and the likely expansion in the fiscal deficit, it is a better idea to avoid long bonds.
Equity market
For those investors who can take risk and have the patience to wait for at least three years, this is perhaps the right time to make some significant wealth by investing in equity markets. On the other hand, if not going to take the risk but want to invest for the long term, then the best-secured option would be small savings schemes which have a higher rate of interest.
The State Bank of Pakistan left its benchmark interest rate steady at 7% during its September meeting, unchanged from previous two months. Policymakers said that high-frequency demand indicators reflect an encouraging pick-up in economic activity and that the outlook for growth has improved due to the easing of lockdown restrictions. The economic growth is now expected to pick up to around 2% in the financial year 2021, compared to a contraction of 0.4% in the year ended June. This lowering of interest rates is in order to boost economic growth and GDP when the economic condition is not conducive. Therefore, the returns that the bank FDs would offer; would not be attractive. Markets being down makes a good time for investors to go for equity-linked investments. If one lacks market knowledge, then they can opt to invest in equity mutual funds.
Gold investment
Gold is another asset class, which may be looked at for its enduring value due to its store of value function. Gold price naturally reflects an upward bias but it has not just been one way but volatile. In an era of leveraged positions and rule-based trading, gold has witnessed massive liquidations, perhaps to raise cash to cover losses in other asset classes. However, like other asset classes, gold, too, has been impacted by this global health crisis which is fast turning into a much bigger economic one. Consumer markets for gold jewelry could see a deep phase of uncertainty as income contraction amid volatile gold prices and supply disruptions could affect buyers’ sentiment.
Real estate boom
In terms of real estate as an asset class, even this segment has faced several ups and downs over the past few years. Real estate has traditionally been a favorite for many investors even before most modern stock markets had started trading. This preference is based on three underlying benefits i.e. regular income in the form of rent, security & safety and healthy appreciation in value. One of the biggest arguments in support of real estate has been its tangible nature. It is a physical asset that can be used for residence or leased out to generate income. And unlike other asset classes like stocks, no crisis can wipe out your real estate investment entirely. Real estate returns may not have touched dizzying heights like stocks and gold but neither have they hit rock bottom. However, due to the lockdown, the sector has also been hit with construction being halted due to the lockdown. In the next few months, there may be a dip in the pace of the sector with reduced new launches and extension in completion of projects. However, housing remains a basic necessity, and demand will continue to exist once the situation normalizes. The sector has displayed tremendous resilience in the past while battling challenges, and it does have the potential to gradually overcome the challenges thrown by the pandemic.
Epilogue
However, all portfolio investments should be commensurate with one’s risk appetite, time horizon, and financial goals.
[box type=”note” align=”” class=”” width=””]The author, Nazir Ahmed Shaikh, is a freelance columnist. He is an academician by profession and writes articles on diversified topics. He could be reached at nazir_shaikh86@hotmail.com.[/box]