COVID-19 Economic Impact Similar To BP Oil Spill In 2010, Says Analyst

Victor Argonov, senior analyst at International Investment firm EXANTE, says

Mexic (UrduPoint / Pakistan Point News - 28th Apr, 2020) History has shown us that crashes are usually quick and only last as long as there is a lot of uncertainty. If, however, certainty increases, then the markets recover rapidly, even if the disaster or the war is still going on. There are several factors that stimulate optimism in the market's participants. They could be broken down into rational factors (ones that can help one maximize one's profits in the most efficient way) and irrational factors that stem purely from emotions.

When trying to compare the COVID-19 with previous disasters or crashes, the closest comparison we can find is that of the oil spill on the BP platform in the Gulf of Mexico in April 2010. In both cases the scale of the disaster was unclear for a long time. In addition to that, the S&P index fluctuated wildly with many local minima that could have been mistaken for the bottom. It is likely that many investors miscalculated and purchased as many assets as possible during that false bottom before the real one was reached.

With the oil spill, the crash did not happen until May 2010, and lasted until early June with several brief recoveries. By the end of the crash the index fell by 17 per cent. The index began to recover in earnest afterwards, even though the oil spill itself continued until September.

S&P 500 regained its pre-April level by November. This confirms the pattern we stated earlier: the fall happens during a period of uncertainty. In the first days after the fire at the drilling station the investors did not believe that the problem was going to last as long as it did. However, when it became clear that the spill is not contained yet, more pessimistic outlooks started to appear, as some people assumed that the disaster was going to escalate indefinitely. The longer the spill lasted, the worse the prospects seemed. The indices only started to recover as the efforts to combat the disaster started to bear some fruit.

As for COVID-19, whether the bottom in March was real or not depends on a factor that is yet undefined – how long the quarantines are going to last. Even if they are going to decrease the number of new cases per day, this decrease seems small so far. However we’re already seeing growth in some corporate stocks– not because the investors expect the crisis to end soon, but precisely because the crisis increased the demand for these stocks, and that demand is likely to remain high after the crisis as well.