Photo by Rupixen on Unsplash

What coronavirus teaches us about investment and your money

Many Nigerian entrepreneurs  and dropshippers rely disproportionately on imports from China for direct sales to consumers or as critical products needed for our struggling manufacturing sector. A disruption to this crucial supply will directly affect consumers and businesses.

 

Coronavirus has shocked everyone and almost every economic sector or activity has responded in some way. Besides encouraging us to regularly wash our hands, corona-panic also forced a clean “wash” on the capital markets wiping more than $6 trillion off the global markets, as Coronavirus Disease spiralled out of control. For ordinary consumers, prices of nose masks and hand sanitizers soared as people rushed to buy protective gear and hygiene products to protect themselves from the outbreak, perfectly illustrates the impact on consumer behaviour.

Already global equity markets have lost $7 trillion from the levels of February 19, with the United States of America accounting for more than $ 4 trillion of those losses. Last week we were inundated with reports of sharp dips in share value that saw major equity markets around the world nosedive, by at least 10% to 2008 global economic crash levels.

What happened?

Once detected cases of Coronavirus disease spread outside China, fears of a sudden shortage in supply of products critical to manufacturing – a supply shock – led to panic selling of equity in major global financial markets. The Dow Jones Industrial Average (DJIA) was pushed into correction territory to -2.94% alongside the NASDAQ Composite (-2.99%) and S&P SPX (-2.81%). If you are new to investing, the Dow Jones Industrial Average (DJIA or DOW), is a stock market index that tells you how the stocks of 30 America large companies are performing on the New York Stock Exchange and The National Association of Securities Dealers Automated Quotations (or NASDAQ, not to be confused with the Nasdaq composite which is a market index like the DOW). he statement that the DOW and others were pushed into correction territory means that they dropped by around 10%. Why?

China is the factory of the world. (Photo by Ant Rozetsky on Unsplash)
China is the factory of the world. (Photo by Ant Rozetsky on Unsplash)

China is the world’s factory. The Chinese industrial revolution and proficiency in mass production mean that it is where a lot of critical goods are manufactured for foreign firms and consumers. The Chinese advantage in manufacturing is partly responsible for the impressive rise of the Chinese economy. In an age of global trade and the globalist agenda, such dependence is also vulnerable in the face of unpredictable Black Swan events like the COVID-19 outbreak. Once the Dow dived, equity markets around the world followed suit. In Italy, the S&P/MIB index dipped -7.73%, increasing pressure on an economy on the brink of recession, Japan’s Nikkei and South Korea’s KS11 followed suit. However, the supply shock is not the only cause of stocks crashing globally. One other reason for the panic sell-off is that major global markets have been steadily rising in value, so a sudden drop in value makes a lot of people nervous. On the other hand, conventional wisdom teaches investors to “buy the dip.” This creates a nervous paradox for investors who must choose between avoiding further losses or acquiring more assets.

Emerging markets (especially those heavily dependent on oil exports) like Nigeria, were also on the receiving end of economic fallout from coronavirus. Last Friday, the Nigerian Stock Exchange closed with major indices in the red zone following January losses. The bearish trend is partly driven by investors’ fear of supply shortages for products coming in from China and the recent drop in crude oil prices fuelled by the global market effect of the outbreak. For perspective, the 2020 budget of Nigeria is pegged on a crude oil price of $57 per barrel and anything short of this benchmark is a bid red flag for a huge deficit budget.

Why is this important?

Many Nigerian businesses rely disproportionately on imports from China for direct sales to consumers or as critical products needed for our struggling manufacturing sector. A disruption to this crucial supply chain will directly affect consumers and businesses, because, nearly one-fifth of Nigeria’s import are supplied by China. In 2018 Nigerian imports from China amounted to $8.3 billion and in the first six months of 2019, Nigeria spent over 1 trillion Naira on imports from China. The value of Nigeria’s reliance on Chinese products to consumers and business is clear, and the risks associated with such dependence are being highlighted.

 

Furthermore, Nigeria, currently Africa’s largest economy (after South Africa officially slid into a long-expected recession yesterday), depends on crude oil for more than 50% of our income and about 90% of our export revenues. With depleted foreign reserves, a CBN that has been artificially propping up the naira, multiple debts and soon maturing bonds, the coronavirus disease is one more pressure Nigeria’s fragile economic outlook could do without. In fact, as late as yesterday, Nigeria’s finance minister, Zainab Ahmed, has raised concerns about the impact of falling crude oil prices on the budget and has hinted at a possible budget review.

The OPEC may help stricken members by placing production cuts, but with Nigeria’s production already lagging far behind expectations in the early ‘90s. Such cuts may have negative or no effects on the situation as it will force Nigeria to sell less crude.

If the coronavirus pandemic is short-lived, its major impact on you the investor or consumer, may not go deeper than the added (but useful) inconvenience of regularly washing your hands, avoiding people who cough and buying hand sanitizers and nose masks at exorbitant prices. However, a sustained spread, can potentially grind the already delayed shipping to a halt and drive prices far too high – at a time when inflation is topping 12%

How to build a pandemic proof investment portfolio

The biggest economic lessons of the coronavirus outbreak are surprisingly simple and serve to remind us of common-sense investment and business basics.

Never underestimate the impact of Black Swan events

The term comes from the discovery of a Dutch explorer, Willem de Vlamingh, who came across birds that looked like swans in Australia but were inexplicably black. To 17th century Europe, black swans were unimaginable. Everyone just assumed that swans were always white. In modern terms though, a Black Swan event is a highly improbable event that is also very unpredictable. Some examples of Black Swan events are earthquakes, wars and epidemics like coronavirus disease. They cannot be modelled, and the impact varies so widely that they cannot be correctly priced into any theory. The best strategy for managing Black Swans incorporate good communication and developing tools that map supply alternative supply chains and reduce uncertainty. Dealing with such low-probability-high-impact events ultimately devolve into creating better risk management practices.

Diversify! Diversify!! Diversify!!

Of course, this means that you must invest more time learning about the investment options you have, your risk profile and why you are investing. It also means that you should probably look beyond traditional equity holdings, especially if you are a long-term investor, which may probably be the best way to make meaningful returns overtime. One way to reduce your exposure to risk is to build a portfolio that includes a healthy mix of traditional equity holdings and the less risky and government bonds.

In the end, there is really no fail-safe strategy for investing – the closest that comes to that are index funds – you should invest in acquiring more financial knowledge, not just about financial markets, but also money management skills that can help you stay ahead of the curve. The cost of not knowing better is always greater.

Related post

Leave a Reply