5 Lessons learned from the Coronavirus led market crash 2020

5 LESSONS LEARNED FROM THE CORONAVIRUS LED MARKET CRASH 2020

1. Stock markets are always a forward-looking mechanism
2. The stock market is the riskiest investment alternative
3. Stock market crash does not only bring fear and losses but also bring confidence and profits
4. Coronavirus led stock market crash 2020 is a new type of market crash
5. The central bank is the only confidence booster in the crisis time in the economy. Central banks around the world have adopted numerous primitive and innovative tools to curve the situation.

In the above graphical presentation, the NEPSE index is compared with the S&P 500 index until March 22, 2020. These indices have their behavior until the time. We were reached to the peak for the year when the S&P 500 was signaling the global coronavirus pandemic. Then, both indices experienced the fall together even though we are not aware of the reason is the same. But, after March 23^rd’s deep, the US stock market has started to gear up with its central bank's giant stimulus package which is still moving in a positive direction. Unfortunately, the Nepalese stock exchange is closed (indicated by the red line in the graph) due to the nationwide lockdown to deal with the coronavirus situation. We have missed the behaviors of our investors. We are unknown with how they would deal with the situation? How they would process the market information? how they would make their investment decisions? etc. If we were open after March 22^nd to date, we would have answers with these questions. We hope the Nepali Stock market will open soon with the improvements in its basic infrastructure to deal with the situation and hopefully we will not close again.

Relevance to Nepalese Stock Market:

1. Yes, the Nepalese stock market does follow the same principle of forward-looking mechanism. But we have not seen such practices widely applicable in the market. Again, the stock market does follow the events possibly happening in the days to come and according to factor in today's stock prices and it's not always wise to rely on the historical data and records, as history never repeats in the stock market.

2. Market mechanism represents the mirror of the investors' sentiments, the single most important variable to read the market movement, but we are missing such opportunities time and again. To be a mature investment community, we must go through the ups and downs, and we should have developed such risk tolerance capabilities in line with the phrase ‘Survival of the fittest.' The experience of the stock market crisis would certainly expose the community with risk. At the same time, such exposure gives us one-time opportunities for learnings. This time, we missed the learning opportunity due to the complete closure of the only stock exchange! It is the fact that every now and then the stock market crisis is inevitable and we must ride through those waves not to be extinct.

Our stock exchange must adopt the available technologies at least moderate if not state-of-the-art. The objective should be how to keep the market open despite the strike, crisis, pandemic, etc. Access to the liquid assets is the rights of every investors. We have noticed that there is considerable spending of public funds for software and technologies, these spending should be meaningful.

On the other hand, the important periodic data must be publicly available. Investors should understand and use them when they make investment decisions. It's also equally important for financial intermediaries who make investment decisions on behalf of their clients. The economic indicators as follows (at least) are required for investors;

Similarly, the public company-specific variables should be easily and publicly available for investors to strengthen their decision power in a timely and with the greater confidence. Also, making the estimates public would make the listed companies more committed to keeping their words to maintain the value for their stockholders.

This is the very important implementation dues for a long time in our stock market, the duties of the regulators should now be on results/results-oriented approach rather than routine and conservatism.

3. Nepali stock investors may have lost some degree of trust in the Stock Exchange due to the sole reason that we have turned their liquid assets (i.e. stocks) to illiquid for a longer period of time. Some investors who need money by selling their stocks to deal with a month-long coronavirus lockdown are certainly not happy with the closure.

In an academic article, “Trusting the Stock Market,” the authors study the effect of trust on stock market participation. They also have discussed the lack of trust can explain why individuals do not participate in the stock market. We get the knowledge from this article that trust building is an on-going process and we must work with our investors to build the trust towards the stock market in Nepal as it is the only mechanism to collect the long-term capital for the public institutions.

4. Nepal Stock Exchange Limited (NEPSE) is a 27 years old institution surrounded by it's the most valued stakeholders. It has crossed its wonderful youth age but we are yet to see its mature behaviors. We hope to see our stock market, stakeholders, would learn to behave with maturity, farsightedness, and at least comparable with its peer stock exchanges around the world. 

Bottom line:

Graphs above are the real trading accounts performance during last 3 months, the first graph (green), which is the trader’s account that follows the short term buying and selling strategy, has surpassed before the Corona Crisis portfolio value relatively early. This is proof that the crisis has given traders the opportunities to trade and make short term earnings. Whereas, the second graph (red), which is the investor's account, that follows the buying and holding strategy, has still room to reach to its before the crisis period portfolio value. This is proof that investors lose the value of their portfolio in the short term but as the market recovers the investor’s portfolio also recover. The overall market in the US is still down 11.37 percent as of April 28^th, 2020 from the beginning of the year 2020. All this evidence gives an idea that both the investors and traders must have good knowledge of selecting stocks, finding the right time to buy and sell, allocating appropriate funds to the individual stocks, follow the investment objectives, etc to deal with the adverse overall market performance.

- Sudarshan Kadariya