By Sarah Whitebloom
Markets have this week headed south and then north again, as investment centres around the world respond nervously to the coronavirus outbreak, but a leading Oxford finance expert maintains the impact of the virus on the overall economy and the markets is not likely to be long-lasting.
Bige Kahraman Alper, Associate Professor of Finance at Oxford’s Saïd Business School says: ‘There has been a huge market reaction…there is both a negative supply and a negative demand shock.’
But, Professor Kahraman Alper maintains, the situation looks very different from the global financial crisis of 2008. Share prices tumbled. The FTSE 100 index fell some 20 per cent in just eight days – from 6,815 on 4 March to 5,459 on the 12th. But on the 13th, the index staged a recovery of more than six per cent in opening trades.
According to Professor Kahraman Alper, there are genuine issues relating to fundamentals, for several companies earnings’ forecasts are revised downwards for the forthcoming quarters, but many of the supply and demand problems are likely to recover and some are simply related to market sentiment.
Professor Kahraman Alper says, for a subset of companies, though, it is possible to observe long-lasting effects. Companies, which may have poor financial profiles or which are in particularly hard-hit sectors, may be vulnerable and potentially some could become insolvent. She says: ‘There will be demand bounce-back and overall businesses are most likely to recover from the demand and supply shock.’ But, she says ‘not all’ will do so.
Concerns over corporate insolvencies are clearly having an impact on the markets – although it would mainly be smaller enterprises affected. But Prof Kahraman Alper says: ‘Financially constrained and struggling businesses, even if they are not quoted, are bad for the overall market.’
Other than falling indexes, the current crisis bears little similarity to the market crash of 12 years’ ago. Prof Kahraman Alper points out that this time problems did not start in the financial sector, which was strengthened following the global financial crisis.
But, she says, if the markets continue to tumble, there could be genuine knock-on effects for the asset management industry. Banks may not be as vulnerable as they once were, but in theory, if the current trends market continue, there could be runs on funds under management.
‘If market prices go down, we may see runs on hedge funds and asset managers,’ says Professor Kahraman Alper.
But, she maintains, the authorities, such as the Bank of England, have been closely watching developments – to make sure this does not turn into a full-blown financial crisis.
‘They would try to do what it takes around a scenario where there is a run,’ she adds.
And the current situation is very far from such scenarios. The Chancellor announced in the Budget a package of measures aimed at supporting individuals and business and there are a number of tools in the financial watchdogs’ toolkits. On Wednesday, the Bank of England cut interest rates.
But rates cannot go down much further, without going negative. If it were necessary, the authorities could inject capital. But, says Professor Kahraman Alper: ‘It all depends on what actions are taken today….The things we do now will determine the long-term consequences on the market.’
Encouraging everyone to follow a long-term and contrarian investment strategy, a strategy that historically delivers high investment returns, the professor suggests that, if each person were to invest, say, $10 in the market, it would be good for their finances - and help the markets.
‘The recovery is an opportunity,’ she says. ‘It’s a good time to invest – and it would help the markets to recover faster.’