This year, COVID-19 has shaken the global economy. Highly contagious, the virus spreads like wildfire. Only a handful of countries have reported no cases of infection. The pandemic put a halt to international travel, and it caused countless economies to shut down.
Traders and investors need to adapt to the new reality. Financial markets were quick to react to the worldwide panic. What lessons have they taught us?
1. Flexibility Is Survival
It is clear that the effects of the pandemic will be felt for years to come. Thus, in order to survive, businesses need to be flexible. Human existence may never be the same. Corporate models have to be adjusted accordingly.
Traders and investors should search for the most resilient stocks. These belong to companies that managed to reverse the fall quickly. For example, HDFC Bank started speedy recovery thanks to wise asset control. Reliance struck a deal with Facebook. TCS shifted its focus to computer technologies, etc. When a crisis hits, it is only the most adaptable who survive.
2. Blue Chips Are Not Invincible
The ‘too big to fail’ argument is invalid. Even stocks of industry leaders may take a plunge in times of crisis. While they are generally safer – stronger and less volatile – they aren’t immune. When the going gets rough, even they may take a downturn.
Once the WHO declared COVID-19 a pandemic, the stock exchange nosedived. Comparisons to the Great Depression are now common, and they sound ominous. No one can foresee when the spread will stop.
Consider what happened with the stocks of General Motors. Like Disney and Coca Cola, this giant is seen as stable. Still, the company shut down several plants, and its shares lost value. Shares of the other two companies were traded with a discount.
Correction triggered by this pandemic exposed corporate vulnerabilities. Lockdown measures and their projected consequences make investors anxious. When consumption is bound to shrink, and loan defaults are inevitable, it is hard to remain upbeat.
3. New Investment Horizons
Every crisis is an opportunity in disguise. This old cliche is true, as changes are an organic element of evolution. As some opportunities vanish, others spring up. For instance, pharma stocks have surged.
For consumers, this economic shock revealed new methods of earning. Residents of Nigeria and South Africa take an interest in Forex trading. Through registered brokers like FXTM, they may profit from currency exchange. It is also possible to trade stocks, commodities, and other assets without owning them – via derivatives. Local opportunities for Forex trading are impressive.
4. Dangers of Long Positions
Long positions aren’t always risky, but they are dangerous for volatile instruments. On April 20, oil traders were taught a much-needed lesson. By the closing of the market, WTI had collapsed to just over $37 per barrel. Holders of long positions recorded jaw-dropping losses. By April 21, they had lost four times as much.
5. Hope is Flawed
Hope dies last, and it is hardly a rational motivator. Emotions are the enemy of any trader. Decisions and strategies must include healthy risk management. Irrationality in the stock exchange may outlive your solvency. Whatever market you trade on, long positions are dangerous.
Since the early 2000s, debt funds have been perceived as safe. This terrible misconception had to clash with reality sooner or later. Investors preferred to remain oblivious, even despite defaults by the Essel Group and other giants.
Eventually, Franklin Templeton Mutual Fund delivered a wake-up call. Six open-ended debt funds were shut. This showed that anyone could suffer from unjustified optimism.
6. Diversify As Much As Possible
This crisis reminded the financial community about the value of diversification. Diverse portfolios have lower risk, as it is spread across a number of instruments. Consider a trader with currencies, stocks, and derivatives in their selection. If currencies bring a loss, profit in other areas will neutralize the damage.
As the old saying goes, never put your eggs in one basket. Over the past 12 months, those who added gold to their portfolios have reaped sizeable gains. Had they relied on stocks alone, the result would have been negative.
What Lies Ahead
Sooner or later, crises do happen. The downfall is always followed by the recovery and redistribution of assets. This means that resources are put to better use, and the world moves on. Every plunge is an opportunity to learn and improve financial policies. While restructuring is taking place, traders should choose the least risky assets. In the long run, this pandemic will become history – like all the crises before it.