Labelled as a global health emergency, the novel Coronavirus outbreak has widespread impact ranging from ecological to economic implications. Over 80 countries have collectively registered over 90, 000 cases since the first reported case in December 2019 in China.

With one of the world’s biggest economies at the epicentre of the novel Coronavirus outbreak, the impact of the virus is being felt on the global market. Closer home, the Indian stock market has seen some significant dips owing to its geographical and economic closeness to China.

How has the virus outbreak affected China?

The outbreak signifies potential disruptions in the supply chain owing to China’s position as one of the biggest exporters of material to countries far and wide. Factories may be shut down, and consumer spending may drastically slow down if not freeze. When demand and supply get severely disrupted, so do the industries and the stock market.

Implications of Coronavirus on Indo-China trade

India is a significant importer of China’s electronics, computer hardware, mobiles, pharmaceuticals, organic chemicals, and auto parts. India alone accounts for nearly 14% of China’s exports. As an exporter, India sends an estimated 5% of its products to China, including mineral fuels, chemicals, cotton, plastic items, fish, and salt. With China on a lockdown and travel advisories to China being issued by the Indian government, there are implications for the Indian economy, and consequently, the Indian stock market.

With imports reducing from China, the prices of available goods are likely to rise. This will add to the already weak demand in the country. On the supply side, key inputs from China, such as electrical machinery, can affect the supply of goods. Finding an alternative to the inexpensive China products will be a challenge and lead to a dip in supply.

The lack of supply and demand can cause investors to be cautious and not invest further or withdraw from the Indian markets in the foreseeable future.

The coronavirus’ impact on the stock market

The effect of the virus in India was first felt at the end of February. On 28th February, the Indian share market saw a massive crash; more than Rs. 5 lakh crores in investor’s wealth was wiped out, attributable to the Coronavirus scare. The Indian indices registered a 3.5% fall which was the second-biggest fall in the history of the Sensex. The Indian stock market recovered its losses on 2nd March, but with recent cases of coronavirus being reported in India, the markets again ended on a negative. As of 9th March 2020, the Sensex crashed by over 1900 points in one day. This is considered the most significant intra-day decline since August 2015.

The stock market has historically been prone to fear psychoses, and this is one such instance. However, there are legitimate reasons for the Indian stock market to worry and one such worry is China’s role in the supply-demand chain in both, India and globally.

Impact on share market due to lack of supply

As mentioned earlier, India imports a series of raw material and parts from China. Usually, automobile companies who rely on China for their raw material supply stock up on their raw material inventory owing to the Chinese New Year Lunar holiday season when the Chinese plants are shut. The holidays coincided with the uproar so the Indian companies did not face an immediate supply crunch. However, if the self-imposed trade restrictions continue, the supply of vital raw materials could stop, with major companies like Tata Motors, Eicher Motors, Bajaj Auto, M&M, Hero Motocorp, and TVS Motors feeling the heat.

Similarly, the pharmaceutical industry in India could be affected. These companies import up to 67% of the active pharmaceutical ingredients needed for manufacturing their products. It is common for pharmaceutical companies to stock up on at least 2-3 months’ worth of raw material so that they won’t face an immediate struggle. But, if the supply disruption from China continues into the next quarter, these companies could end up having to import from elsewhere. This will either increase the costs of production or reduce supply. Either way, it bears implications on the pharmaceutical industry’s standing in the stock market.

The automobile and healthcare industry are significant stakeholders in the Indian stock market. If their operations and production get affected due to the Coronavirus outbreak and China’s lockdown, it could lead to reduced investor faith in the market.

There is another side that sees the opportunity in this uncertainty. Short-term players are selling off shares fearing a global recession, making more stock available for a lower price. Opportunists may choose to “buy the dip” and accumulate shares presuming that the market will soon correct itself and recover.

An Oily Silver Lining for India

China’s economic lockdown has reduced its crude oil consumption. The drastically reduced demand for oil from China means a global reduction in crude oil price. India has registered a 25% decrease in its oil price since the end of January. As an economy that depends on oil imports to meet 80% of its oil needs, it has come as a welcome relief for India’s already struggling economy, which also affected the stock market. Listed companies which reply on crude oil for their production and transportation will benefit from the drop in crude oil prices. Subsequently, this will improve their standing in the stock market.

Optimism for the next quarter

With summer approaching, the coronavirus may find its natural death, and government and pharmaceutical research companies will have made some progress in terms of a vaccine and cure. This will instil faith in the economy, and the market may gradually rise. If the past outbreaks of SARS, Ebola, Swine Flu are any indicators to go by, “this too shall pass”, and the Indian economy and share market will survive this slowdown brought on by the coronavirus.

For now, all investors, big and small, are keeping an eye on the global indices, the growing count of recent Coronavirus cases, and government interventions to understand their role in the current share market volatility.