Financial Market Commentary: May 2020


Covid 19 – Impact on household and personal finances

The income earning capacity of an individual helps one to decide whether to borrow or to save. During good times, a professional may decide to borrow knowing that the current income may not be sufficient to buy a home or a car while another person may decide to create an income buffer to take care of one’s income volatility.

Economists believe that there are two ways households react to income volatility depending upon how they read the future as to whether the income shock is temporary or permanent from a psychological or economic perspective:

  1. If perceived as temporary, they would borrow to protect consumption levels;

  2. If perceived as permanent, they would increase savings to meet wealth targets.

There is no information to suggest what the Indians may be doing now. Some might have dipped into savings while others may borrowed through their social circles or could have curtailed their consumption. Income volatility can lead to higher precautionary savings.

Some with steady income might have started increasing their savings.

As per Niranjan Rajadhyaksha in his article in mint says that, If the economic pain deepens, one will start increasing savings provided income and assets are more or less intact. People hold financial assets for 3 reasons:

  1. Daily transactions;

  2. For Speculation (sensitive to interest rate);

  3. For precaution.

Those who have lived the Great Depression or the financial crisis remember that savings rate generally rise after a major crisis as the current times. This is especially pertinent for India with the lack of a social security net and lack of income support from any quarter/s.

The effects of the above on macro economics are the following:

  1. Discretionary spending will come down as a proportion of income as households save more;

  2. Demand for bank deposits and government bonds will create space for fiscal expansion till private sector investment pricks up;

  3. Higher savings will impact the current account balances with the rest of the world.

In the first fortnight of April’2020, Indians moved Rs.1.30lakh crores from demand deposits to time (fixed) deposits to help it increase to Rs.2.80.lakh crores. Cash holdings have gone up by Rs.41583. crores.

If March ’20 is taken for comparison, time deposits stood at 90% which is about 20% higher than the last century’s average, The lowest point was after demonetisation when citizens went to convert their deposits to exchange old bank notes to new and then the demand deposits swelled.

Savings behaviour is a complex exercise. It is dependant on how one sees her income flow for the future and not merely on the current income.

How does one run a household in these challenging times?

There are two Different aspects for this

  1. Financial

  2. Non – Financial

1. Financial Aspect

The stock markets are crashing:

What should I be doing?

Is this an opportunity?

Is it time to buy already? ……………… . These questions are irrelevant.

We are so used to the narrow definitions of up and down and think that everything can be summarized into simple action points. The pandemic that the world is facing is different. So different from what most of us have seen before, and we are all still learning what to do?

The only thing that matters is the amount of cash you have in hand.

Understand that it is tough for money to be drawn from a falling stock market, or for money to be invested. If you alreadyhave enough in the bank, stay put.

Ensure that for 3 months you have enough cash to manage yourself and the household and medications.

Recognize that this is new territory. In the era of social media, there is too much information floating around.Train your eyes and ears on what has worked for countries that have suffered before ours got hit.

Keenly hear what our government, local authorities are saying. Social isolation is what seems to have worked in China and South Korea.

Do not obsess about the loss in value of your investments.

What matters currently is the income and the cash flow. Do you have a job that offers salary even during the shutdown? YES. If no, evaluate your income and prepare to hunker down and sacrifice it for a brief period and still survive. Wealth will return to its value after the crisis has blown over; if you have the privilege of not having to access it now, stay calm. Do not keep looking at market numbers.

2. Non – Financial

Reduce social interaction; adopt isolation voluntarily and focus on prevention and care for yourself and your community. Do not hoard as if you are faced with a famine.

How does one reduce frivolous expenses where every cost is to be viewed as a luxury?

Given that everyone’s life is different, it is hard to point to a list of things that is guaranteed to not be luxury for everyone.

So, a list of suggestions to reduce expenditure that either did not have any impact at all on quality of life (things you can do once and benefit from for a while) or, if they are repeatable, are inherently fun.

  • Daily Lunch at hotels, weekly pizza (hoteling at expensive restaurants/ Fine Dine)- carry lunch box most of the times or visit budget hotels/ homely food outlets.

  • Travel: while on travel see to it your hotels are budget hotels even if your company is paying for it as your company is also going through financial crises. Look for deals on airfares and other tickets.

  • Lifestyle: You can save money by cutting back on shopping of clothes. You can make money if you clean out your closets and sell all those clothes you are not even wearing.

    Reading Books should not have to be a luxury. But, instead of spending a lot of money on books, why not get them from your local library for free? Book getting can be accomplished with a Kindle Unlimited membership.

    Buying Movie tickets at the Box Office will save that you will be paying for online booking. Watch movies - rent a movie or streaming on online. There are tremendous savings to be had with streaming movie options.

  • Get some exercise: For starters, most exercise is free or at least very inexpensive. Long walks around the neighborhood, Jogging, Squats, Jumping jacks, Sit-ups and pushups are free. Even simple weight exercises are inexpensive – buy some hand weights. Regular exercise reduces your weight, often not directly, but by raising your metabolism. it improves your long-term health (reducing your medical costs) and improves your day-to-day energy level.

  • Figure out your most cost-effective grocery store and shop in physical / online form.

  • Consolidate your debts, particularly your student loans/ Education Loan.

How does one give back enough to his / her company so that the company stays protected and helps them to overcome this crisis in unison thus safeguarding the company’s employees too?

As millions of workers log into work-from-home to avoid the spread of COVID-19, there is the risk that they could increase the chance of exposure to another kind of virus, the kind that can lock up corporate networks.

The World Health Organization declared the coronavirus that causes COVID-19 a pandemic, a move that will surely boost the number of companies asking employees to work from home. The number of companies that have made that move has grown quickly in the past few weeks.

Companies like Google are well-prepared for such contingencies as they have long had a culture of remote working. Other companies, especially ones that rely heavily on - premise network security protocols, may not have it as easy. For a more traditional company, this change is going to be difficult, because what they have done is they have relaxed security of devices within the perimeter, and now this device has to be taken out of the perimeter [and is] sitting in somebody’s house.

Hope you enjoyed reading this edition


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