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Ideas & Debate

Coronavirus sell-off effects: The good, the bad and ugly

Currency dealers monitor exchange rates
Currency dealers monitor exchange rates in front of a screen showing South Korea’s benchmark stock index (top right) in a trading room at KEB Hana Bank in Seoul on Tuesday. PHOTO | AFP 

Has the market fully discounted the Covid-19 induced sell-off and its effect on company earnings? Are we likely to see more record speed equity declines and nasty drawdowns in the coming weeks? Will the panic dissipate as governments prepare to roll out financial stimulus plans?

The short answer to all these questions is that no one knows. The financial markets are blind to the true trajectory of Covid-19 and may remain so until the tide turns.

My take is that should the virus go beyond what we have seen so far, it is possible we could drop significantly more (we are already at decade lows), but that is a lower probability.

With that said, plenty of opportunities are to be found on a company by company basis. But worries aside, today’s article is a cocktail of good, bad and ugly as witnessed last week.

First, the good: Plenty of positive announcements came from the banking sector. Diamond Trust Bank witnessed an increase of 2.6 percentin profit after tax to Sh7.3 billion. This is in spite of its cost to income ratio rising to 48.6 percenton lower efficiency levels (staff costs increased by 11 per cent).

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A final dividend of Sh2.7 a share was declared (total dividend of Sh2.7). Equity Group also reported a 13.8 percentgrowth in annual profits after tax to Sh22.6 billion.

Net interest income grew by 8.6 percentto stand at Sh45 billion. A final dividend of Sh2.5 per share was declared (total dividend of Sh2.5). Standard Chartered reported a 1.7 percentannual growth in profits to Sh23.49 billion driven by 7.6 percentincrease in operating expenses to Sh16 billion. A final dividend of Sh15 was declared (total dividend of Sh20).

The bad: A bearish “death cross” pattern has appeared in the NSE’s chart and investors should be concerned that further losses could ensue in the near-term.

A death cross occurs when the 50-day moving average (DMA), which many chart watchers use as a short-term trend tracker, crosses below the 200 DMA, which is widely viewed as a dividing line between longer-term uptrends and downtrends.

The idea is the cross marks the spot that a shorter-term sell-off transitions to a longer-term downtrend. For the NSE, this scenario is witnessed at the 2,561 points.

Lastly, the ugly: Market depth (foreign traders all rushed for the exits) has disappeared and volatility has surged as a result. Noticeable liquidity disruptions in some of the tradable names do not inspire confidence.

Moreover, though the sharp stock sell-offs in the midst of the Covid-19 outbreak has given investors a chance to buy into discounted names, it seems the market is getting some “social-distancing” treatment.

On the flipside, “defensive” stocks are also getting crashed.

Some of the blue chip names such as StanChart are spotting some of the highest earnings yields; 10 per cent.

All that said, I have no doubt that long-term, the market would be among the best performing on the other side of the pandemic. But for now, the beat goes on. The bears have it until the music stops.

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