The capital market involves investments for the long term in an entity’s capital constituents i.e., equity instruments and debt instruments. The entity uses these sources of funds to produce goods and services.
The COVID 19 disease, on the other hand, involves choking breaths, killing people, and adversely impacting investor confidence in capital market financial instruments. Consequently, COVID 19 has obstructed new investments and affected existing long-term investments. A system that cannot breathe cannot generate energy and in the absence of energy, all else fails. Frozen sales activity due to increasing uncertainty is a boost for the savings driven economy, while consumption has reduced globally – from essential commodities like oil to trade of everyday requirements thereby reducing spending. Only time will tell if this is a working capital glitch which can be resolved or if there is much more to this than meets the eye.
Though the COVID 19 seems to be an Atlas that bears the brunt for everything wrong happening to the capital markets, the ever prevalent disconnect between entities that produce basic necessities like food, clothing, shelter, health and education and the financial system is just as much responsible for the ongoing misery. This disconnect has let COVID 19 seep through the openings and crumble supply chains due to social distancing, reduced activities, and the flow of data and information in our generally fast-paced era. On the other hand, consumption has reduced worldwide – from essential commodities like oil to trade of everyday requirements.
Inversion of yield curves is a primary indicator of a negative outlook to long term yields from investment in debt instruments. However, most other capital market representations, including the stock markets, in the current scenario are just as imperfect as the information available to them.
In light of the current scenario, cash, in line with the definition of financial assets (IFRS) remains the most preferred financial asset. The consequent liquidity crises in the investment circuit thus, due to a preference for cash, severe short-term losses, and uncertainty, have affected long term investments. New long-term investments have been blocked, and existing long-term investments are being sold off to recover for the losses incurred in short term trades.
The uncertainty due to the newness of the situation to the present market gurus leaves prediction of outcomes merely a fool’s errand. In the absence of reliability in the current investment system, hoping for homeostasis; while we prepare for a further cut in consumer spending to hoard cash seems to be the only certainty.
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