Study measures COVID-19’s impact on financial markets
Among other effects, the COVID-19 pandemic has led to an abrupt decline in economic activity in practically all countries. This has triggered major drops in all the world’s stock exchanges. A study coordinated by Joelson Sampaio, a professor at Fundação Getulio Vargas’ Sao Paulo School of Economics (FGV EESP) and a consultant for FGV Projetos, found that although the novel coronavirus has had varying levels of impacts in different countries, the economic effects have been widespread, and it is not possible to observe a correlation between the pandemic’s impacts on public health and its impacts on the financial markets.
The study found that markets in general declined after February 20. It is believed that the world’s stock exchanges have not been pricing the immediate and temporary effects of the pandemic, but rather the medium-term consequences expected from the global slump.
From a broader perspective, the study identified that despite widespread decreases in 2020, some stock exchanges are still higher than they were at the beginning of 2019. As of April 17, markets in the United States, China and Switzerland were 10% higher than on January 1, 2019.
The Brazilian stock exchange has been severely affected by COVID-19, posting the worst performance out of all those analyzed. In particular, the real estate sector fell around 45.7% in the period examined. Out of the seven sectors observed, the least affected were electricity (+22.08%) and public utilities (+15.90%). According to the study, this is due to the fact that demand for basic items like power, water and sewerage will not tend to fall significantly, even if there is a reduction in purchasing power associated with a possible drop in Brazilians’ income arising from COVID-19. In the author’s opinion, this is a sign that the markets do not envisage a prolonged recession.
The study also evaluated the results of Brazilian state-owned enterprises in the financial, power and utility sectors, those of private sector utility companies, and COVID-19’s impact on the public finances. It was found that the measures taken at different levels of government to mitigate the crisis’ effects will have a major impact on the public finances. The Treasury estimates that this impact will amount to more than 23% of GDP. The government deficit this year is projected to be R$549 billion.
The study indicates that more measures need to be taken by both the government and companies to minimize the negative impacts of COVID-19. Economists believe that microeconomic measures, such as tax deferral, payroll tax breaks, a loosening of labor rules (in return for the guaranteed maintenance of jobs) and subsidized loans for micro and small enterprises are policies that could help in both the critical present moment and the subsequent period of recovery. On the other hand, companies also need to take steps to maintain their markets. The study indicates that they should anticipate problems and not wait until they run out of cash before seeking loans, given that this process tends to be time-consuming and bureaucratic. Another option mentioned in the study is to negotiate with suppliers and seek to be transparent with all stakeholders. Finally, the study says that innovation could be a driver of economic and financial recovery and development.
The complete study is available here.