Should Stock Markets Close Over Coronavirus Pandemic?: A walk down memory lane, India just lost their second wicket as Sachin walks back after 6.1 overs. This moment from the 2011 World Cup final has been etched in our memories. With the two important pillars gone lets hypothetically imagine someone decides to call it quits and shuts the TV off. What new levels to your anxiety would you discover? Similar is the anxiety-driven plight of an investor on hearing the news of market closure in tough times.
( The Sensex Index showing a 34.22% fall from Jan 17th to Apr 03)
The stock markets, however, face stakes a million times higher. Ever since the Sensex summited at 41945.37 points on 17th January, it has fallen a total of 34.22%. The Sensex broke the max single-day fall a number of times, losing over 13% in a day ( on March 23rd) and ended at 27590.95 points as of 3rd April. After the government took additional measures by imposing a lockdown to fight Coronavirus, the ANMI ( Asociation of National Exchange Members) requested the SEBI to close the stock market.
This request was made due to the difficulty faced by employees of member partners to commute to work amidst the lockdown. The request also included that the markets should be shut till the depository and broking services are declared essential by the government. We can also see #bandkarobazaar trending on twitter but this was supported mainly to avoid further fall of the market.
Today we look at the historical market closures, reasons supporting a market shutdown and also why such an action may be detrimental.
Historical Stock Market Closures
Dating back to the 19th century the stock markets have been shut a few times around the world over dreadful occasions. The most infamous of these market closures being the 9/11 crash in the US, where the market was closed for a week.
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HongKong had halted its trading in wake of The Black Monday crash in 1987 and Greece closed its markets for five weeks in 2015 during the economic crisis. Moreover, the stock exchanges have been forced to shut down a number of times during natural calamities too.
Nonetheless, there also have been periods of extreme difficulty such as The Great Depression of 1929, World war 2, and even the 2008 crisis of our time where the market remained open.
Should Stock Markets Close Over Coronavirus Pandemic?
Argument for closure of the market
One of the major reasons for the call towards the closure of markets has been to reduce the volatility of markets and panic selling. A closure of the markets will give investors a few days to catch their breath and reevaluate their positions instead of blindly following the market sentiments due to the COVID-19 pandemic.
— Why closure is required in the Current Scenario?
In the wake of the COVID-19 pandemic, social distancing has become a necessity. This would prove challenging for stock market employees and the employees of dependant services to risk their lives by venturing out to work. This may further escalate to the market being crippled if they are infected.
Argument against the closure of the stock market.
— Investor confidence at risk
One of the major reasons against the closure of markets is that a market closure will further erode all investor confidence in a particular country. This will be caused due to the lack of transparency and data available to investors during the closure. In a time of crisis where investors are already panicking, a closure will only intensify their anxiety. This will increase the possibility of them selling out of the markets.
— Lack of liquidity
The effect the closure will have on the liquidity needs of individuals will also be severe. This is due to the fact that a number of individuals depend on trading for their daily income. Apart from this, investors depend on the stock market for liquidity. In a country like India, which is already troubled by the 21-day lockdown, the closure of stock markets will further intensify the liquidity issues. This is because a number of individuals have already lost their regular income by means of unemployment or pay-cuts. The stock market shutdown would further hurt them as converting their investments could have helped them through these difficult times.
Other Stock Market Closures around the world
The Philippines Exchange shut on March 17th following the lockdown imposed by President Duterte. The Sri Lankan markets also followed suit. The Philippine stock exchange, however, suffered severe losses once it opened up two days after the closure. The opening day slashed 13.34%.
(Jeffrey Halley, a senior market analyst at Oanda Asia Pacific Pte)
We also take a look at the Chinese stock market which was one of the worst-performing stock markets in the world before the crisis. During the crisis, however, the SSE Composite Index fell only 10%. This was despite them being the epicenter of the pandemic, whereas markets around the world shed a quarter of their earnings.
The COVID-19 hit China at a different time in comparison to the rest of the world. The markets closed on January 23rd (also due to the Chinese new year when china was still battling COVID-19) at 2976 points and opened on February 3rd falling to 2746 points. During this period china had anticipated the effects and infused $173 billion into the markets but still suffered the loss.
However, the Chinese markets cannot be set as an example as only 4% of their market amounts to foreign capital. The rest remaining in the hands of the Chinese government, directly or Indirectly. Also, China is not known to release adverse data into the public eye. They have been accused of manipulating the actual figures of COVID-19 cases. They were also accused of suppressing the outbreak which then lead to a wider spread.
In this article, we tried to answer should stock markets close over coronavirus pandemic. In short, it could be assumed that investors around the world may forgive closures due to the COVID-19 outbreak. This, however, does not offer enough validation in support of the closure. Thanks to technology and additional support in the form of ‘Work From Home’ continuity can be ensured.
In addition, the stock exchange can take notes from the BCP plans of RBI. The individuals critical to the RBI continuity were moved to a secure location. Here, everyone involved including the support staff (hotel etc.) were quarantined. They will even be working with hazmat suits, maintaining social distancing with a backup team too. Hopefully, the show keeps going and market closures do not add to the woes of 2020.
Aron, Bachelors in Commerce from Mangalore University, entered the world of Equity research to explore his interests in financial markets. Outside of work, you can catch him binging on a show, supporting RCB, and dreaming of visiting Kasol soon. He also believes that eating kid’s ice-cream is the best way to teach them taxes.