In 1994 Surat was hit by a deadly plague. While the plague started in Surat, Gujarat, Maharashtra saw the maximum fatalities (488) in the country.
A similar pattern has emerged with Covid-19. Though the virus originated in Wuhan (Capital city of Hubei province), the virus is killing more people in America, Europe, Iran and Egypt.India has in comparison, fared far better. By imposing a lockdown at a very early stage, India may have prevented a major disaster.
While the focus of the Indian government is containing the Coronavirus spread, there are a economic undercurrents flowing unnoticed.
A simple scenario comes to our mind. Think of a well-developed, rich country, Norway. Norway is the world’s largest oil and natural gas producer outside the Middle East. The Norway Petroleum industry accounts for more than a quarter of the country's gross domestic product (GDP).
A resource rich country, Norway has also fallen prey to the deadly Coronavirus.
To stop the spread of COVID 19, governments across the globe have imposed strict lockdowns.
Economic and commercial activities have drastically slowed down as people stay indoors and maintain social distancing.
This has resulted in a massive drop in fuel consumption and demand for crude oil. The low consumption and demand has resulted in a situation of oversupply leading to massive reduction in the price (very basics of economics) of crude oil.
Other major oil producers such as Russia, Saudi Arabia and US are working to arrest the fall of crude price by reducing output. The measures taken by these countries are helping in stabilizing oil prices, but only to some extent. Refer to the chart below which shows the drop in Crude oil price, which has reached the same level as of 2002.
Let’s go back to Norway, which has long enjoyed economic surpluses since the development of its hydrocarbon resources in the 70’s. This reality, coupled with the desire to mitigate volatility stemming from fluctuating oil prices, motivated the creation of Norway's Oil Fund.
On behalf of Ministry of Finance, Norwegian central bank created an entity known as Norges Bank Investment Management (NBIM), which has been managing global investment funds. The purpose of the fund is to invest parts of this large surplus generated by the Norwegian petroleum sector.
In order to drive more value for funds, since its inception, the fund has been an active investor in international financial markets, with additional objective of making it independent from the Norwegian economy. The fund has invested in 73 countries and India is one of the major recipients. Nine billion USD is the investment amount of this fund in Indian equities with holding in 317 entities.
The COVID onslaught has had a serious negative impact on economies of various nations. For example, US unemployment is at historic high since 1940, a clear sign of financial stress in the country. Similarly, due to COVID-19 outbreak the Norwegian government is facing its worst economic setback in 50 years and has had to implement various measures to limit the consequences of the outbreak. This has resulted in a sharp increase in government spending. The increase in spending has come at the time when Norwegian government is facing shortage in revenue due to discounted crude oil prices. As a related measure, Norway has decided to withdraw investments from its wealth fund (NBIM), to bolster their own economy.
A withdrawal or offload by the Norwegian Fund may have an adverse impact on stock exchanges in India, especially for the companies where NBIM is invested. Fall in NIFTY or SENSEX would be dependent on how much offloading has been decided by NBIM from the Indian security market.
Out of 317, some companies may be directly impacted as NBIM has significant holding in these prominent companies. Intervention may take place, some DII (Domestic institutional investor) will come to rescue the entities to ensure impact is not very high.
· Reliance Industries Ltd
· Infosys Ltd
· Housing development finance corp.
· ICICI Bank
· Kotak Mahindra Bank
· Bharti Airtel
· Maruti Suzuki
· HCL technology
· Sun pharma
· Bajaj Auto
· Tech Mahindra
The economic impact of COVID-19 is expected to be severe and there is much pain in store due to the fallout of this pandemic and continuous lockdowns.
Not just the security market, COVID 19 will also impact the EMI servicing capability. We might see a spike in delinquencies post moratorium period. EMI servicing is referring to Home loan, Personal Loan etc. The magnitude of impact will be across different asset classes, where impact on one class may differ from others.
This article has been written for education purpose.
Stay Safe, stay financially healthy.
Article Authored By Amarjeet Tiwari,
Director - Technology & Innovations, Care Risk Solutions.
You can also reach out to Amarjeet on firstname.lastname@example.org