Sergei Dobrovolskii, IQ Option Director and Founder of London fintech company Amaiz, on the market effects of coronavirus and where to invest during a black swan event.
How badly has the coronavirus pandemic affected company stocks, and in general, how do you think it will affect consumers and the world economy?
The coronavirus pandemic is already affecting Europe and the US after China was the first to get hit hard. Certain industrial production was cut dramatically, while stimulus measures introduced to offset the impact are mostly short-term in nature.
Companies like industrials, airlines, and cruise ship operators, as well as tourism in general, were hit immediately. Other companies like auto manufacturers or even companies like Apple that rely on complex supply and production chains have also been affected.
On the other hand, tech companies like Facebook, Netflix, Amazon, Electronic Arts, and service companies like Walmart faced better prospects as lockdowns were observed around the world.
Some of these companies have even grown certain aspects of their business as restrictive measures have altered consumer behavior.
For example, streaming companies like Netflix and online retailers like Amazon can expect high demand during these times.
Alternatively, companies that offer luxury goods or non-essential goods will be likely to face sluggish demand for their products.
Countries like Brazil and Nigeria could face situations similar to those seen in Europe, Asia, and the US if the number of infected exceeds certain thresholds.
Have you any advice on investments during a “black swan” event like this? Where have traders lost and where have they gained?
Obviously, during unpredictable and catastrophic “black swan” events like the coronavirus, certain assets are hit particularly hard. Investors rush to safe-haven status assets like gold, the US dollar, US treasuries, or the Japanese Yen. These relatively safer assets have gained price while riskier market assets have experienced dramatic falls.
Traders who have been buying riskier assets like stocks (S&P 500, Nasdaq, etc.) have certainly seen losses, while those investing in safe assets have found money-making opportunities.
On the other hand, traders can profit from riskier assets by selling them. So, it’s the opposite of buying low and selling high to make a profit. The trader sells high and buys back lower, which is feasible with an instrument like a contract for difference (CFD). IQ Option offers traders the opportunity to profit from both rising and falling prices through CFDs in a user-friendly interface.
Which markets are the most affected by a decrease in demand, falling oil prices and coronavirus’s negative impact on the economy?
The decrease in demand for oil and consumer goods has hurt oil prices, stocks and stock indices in general. While there are some bright spots in stocks for companies like Amazon, Walmart and Netflix, the market has been hit hard. Energy companies have been especially affected, as the fall in oil demand triggered by quarantine measures was exacerbated by price wars between Saudi Arabia and Russia. Both planned to increase supply for market share purposes despite the price being pushed so low.
Elsewhere in the commodity markets, precious metals like gold and silver are faring a lot better, and currencies like the US dollar and Japanese Yen are making significant gains.
How did the downturn in the oil market and the drop in prices affect the stock exchanges and investor behavior?
The downturn in the markets has undoubtedly affected trader behavior. We have seen rising volumes and volatility in the majority of assets like oil, gold, exchange-traded fund (ETFs) that track the S&P 500, Forex, and even cryptos.
The economic impact and sentiment of the coronavirus pandemic played a key role as investors and traders initially bought the dip, but were quick to reverse their positions as the bear market took over.
Moreover, the increased volatility has created significant opportunities for day traders that usually hunt large moves within short periods.
What should novice traders be doing during quarantine? Are there any growth points, and when do you think the world will come out of recession?
One advantage for trader during quarantine and lockdown periods is that markets continue to operate. Interest trading opportunities exist in all asset classes, and traders can exploit the increased volatility to make a profit by selling certain asset classes and buying others.
Money management and risk management are essential as increased volatility can be a double-edged sword – being on the wrong side can prove very costly.
Many industry executives anticipate that the worst with the virus could be over early summer. However, there are no guarantees, and a lot is dependent on when things get back to normal.