Answer

Effects of Covid-19 on Global Markets and Economy Research Proposal

Table of Contents

CHAPTER ONE.. 3

1.0      Introduction. 3

1.1      Research Objectives. 5

1.2      Research Questions. 5

CHAPTER TWO.. 7

2.0      Literature Review.. 7

2.1      Theories of Financial Crisis. 7

2.2      Impact on Industries (Multi-Sectoral Impact) 9

2.3      Policy Responses. 10

2.4      Effect on Stock Markets. 11

CHAPTER THREE.. 14

3.0      Methodology. 14

3.1      Research Onion Model 14

CHAPTER FOUR.. 16

4.0      Logistical and Ethical Consideration. 16

5.0      List of References. 17

Effects of Covid-19 on Global Markets and Economy Research Proposal

CHAPTER ONE

Introduction

This research proposal aims at providing a critical analysis of the effects of Covid-19 on global economies and markets. The research is timely since it is staged at a time when more than 213 territories globally continue to fight a health pandemic that has claimed millions of lives and led to mass closure of businesses. So far, there are 20,024,265 confirmed cases and more than 733,601 deaths globally. A rational assessment of the ensuing damage shows that the instability created will have a lasting negative impact on global markets and economies. For instance, operations on the global stock markets have been stopped and postponed leading to a loss of $6 trillion of wealth in a weeks’ time from 24^th – 28^th February, 2020. During the same period, S&P 500 index reported a loss of $5 trillion in value. In the USA, the 10 largest companies on S&P 500 made a combined loss of $1.4 trillion (Adrian & Natalucci, 2020). Some of these losses were recovered in the following weeks before the stock markets closed completely in the month of March. Most of the losses arose from the fears that the corona virus would affect the rational decision making among investors.

Apart from stock markets, different industries are affected. The International Air Transportation Association (IATA) reported that following the COVID-19 pandemic, countries were locking down their boarders and restricting international flights. This led to a loss of $113 billion in the month of January, 2020. Following the gloomy economic outlook reported across many OECD countries, the International Monetary Funds (IMF) downgraded their economic growth projection for fiscal 2020. The tourism industry continuous to be significantly affected following travel advisories to countries inflicted with the virus such as China. Normally, China contributes towards the largest tourists to the UK especially during the New Year Festivities (Surico & Galeotti, 2020). This means global tourist destinations will lose out on the annual billions of expenditures by Chinese tourists. At the onset, the tourist industry further reported increased cancellation of flights and hotel bookings. The entertainment industry also cancelled international events estimated at $200 billion. Even as the disease continues to be contained around the world, its devastating effects on economies and global markets still remain.

The severity of the pandemic has caused severe socioeconomic disruptions. This ranges from cancelation of economic, political, cultural, and social events, postponement of business activities, shortage of supplies especially medical and foods. These shortages have been exacerbated by closure of industries and panic buying. Because of the pandemic, stock markets have been closed indefinitely and employees advised to work from home. The global economy is on go-slow as a result, Surico and Galeotti (2020) report that COVID-19 has triggered the largest global recession ever seen. More than one third of the global population is in lockdown which means people can hardly engage in meaningful economic activities to generate revenue and income. On the other hand, they are dependent on government relief and savings which is adversely affecting the economy. Learning institutions, ranging from schools, colleges, universities and vocational centres have closed both locally and globally in 197 countries. This virus has negatively affected 99% of the student population globally, and mostly, the international students.

            This research proposal is rationalized by the reality that as much as there exists extensive literature on the potential effects of global economic recessions, the Covid-19 pandemic is novel thus less exploited. The research objectives and questions to set the scope of the paper are listed as follows.

Research Objectives

The primary objective

• To evaluate the effect of corona virus on global markets and economy

Secondary Objectives

• To evaluate theories of global financial markets and economies
• To analyse the impact of externalities on the performance of global economy and financial markets
• To critically analyse the effects of COVID-19 on industries
• To highlight the impacts of policy responses on global financial markets and economy
• To establish the extent of effects of COVID-19 on stock markets.

Research Questions

In line with the identified aims and objectives, this research seeks to answer the following questions.

• What do theories of financial markets and economies stipulate about effect of externalities especially pandemics on the performance of global economies and financial markets?
• What is the impact of externalities on the performance of global economy and financial markets?
• What are the effects of COVID-19 on different industries?
• To what extent has the policy undertaken by different countries impacted the global financial markets and economy?
• What is the extent of effect of COVID-19 on stock markets?

CHAPTER TWO

Literature Review

Theories of Financial Crisis

Theoretically, there are a lot of factors that could trigger and cause financial crises. This ranges from natural calamities to manmade factors such as poor corporate governance. The problem of financial crisis dates back to the past 50 years which have stimulated an interest among theorists and financial analysts to explore and understand the underlying factors (Madura, 2020). As a result, there have emerged a range of theories to explain financial crisis. Some of the prominent theorists include Jean Leonard de Sismondi, and Hyman Minisky among others, who have presented different points of view and angles of the causes of financial crisis.

Hyman Minisky presents a post-Keynesian argument backed by economic and financial principles. He analyses the concept of monetary weaknesses in domestic markets. Using the analysis, Minisky explains how monetary disasters are caused by unusual or surprising events as well as instances of debt deflation (Lavoie, 2020). The theory alludes that as economies grow and develop, investors’ confidence enlarges. As a result, they become more aggressive in their risk taking. This is evident in the way their attitude shifts towards more risk taking than taking precautions. In such cases, they tend to overlook the dangers while emphasizing potential profits to be made from investments. The ensuing events trigger an increase in the price of assets, commodities and monetary possessions. With the heightened appetite for risks, any shock in the markets is likely to trigger a financial crisis. This is the case with the current global economy, where different countries have been facing economic uncertainties. BLS (2019) reports that before COVID-19, the global economy was already exceedingly fragile. This is because most countries have experienced unfavourable economic cycles every 4-7 years for the past 300 years.

Learning models and herding models are part of the coordination games theory. The herding model describes a situation where the behaviour of individual investors or shareholders is determined by group thinking (Bohren, 2016). This model is applicable in explaining the impact of pandemics such as COVID-19 on global markets and economies. The herding model notes that profits acquired by a small number of investors could motivate other people to invest in the portfolios because the later investors believe that their profit margins will increase when they figure out how the other investors are maximizing their wealth (Kononovicius and Gontis, 2013; Cayon, Thorp & Wu, 2018). This model works on the assumption that the few successful investors have logical and reasonable knowledge about the economy. It further assumes that investors that make profits have good information on certain asset types and that is why they make high value returns. As much as these assumptions are right, using the herding model could lead to wrong decisions. This is mostly in cases where the first investors made the wrong choice, or the market became saturated thus lowering the returns while maximizing the risks. This is the case with the COVID-19 where because of the resulting fear that markets will collapse, people made herd decisions to withdraw their investment from certain types of assets (Gunay, 2020). This led to a gloom in the stock markets. On the other hand, the same investors were led by herd psychology to invest in the sectors providing essential services in the hope that they will continue to make a profit.

The other model is adaptive expectations or adaptive learning. This model argues that decision making among shareholders is dependent on the newest or latest incidences in the economy and markets (Berardi & Galimberti, 2017). For instance, when the value of certain assets or capital increase spontaneously over a prolonged period of time, then investors will easily be convinced that the market is profitable (Madura, 2020). On the contrary, when newest instances disrupt the market and cause uncertainty, investors will shy away from investing. In such a case, investors begin to doubt the prospects of realizing profits (Berardi & Galimberti, 2017). Adaptive learning model therefore explains how some decisions by investors come about especially after the corona virus shock on the global markets and economy.

The theory of financial contagion describes how a small financial crisis in one country, could trigger a simultaneous spread of a financial turmoil across countries. According to Russian psychologists, financial contagion could be caused by behaviour, attitude and psychology (Erken, 2020). The spread of a financial crisis could be caused by external investors who either withdraw their investments in a country with a stable economy as they are afraid that the financial situations in their country would destabilize the whole global economy. On the other hand, it could be triggered by the behaviour of the local investors. This is often a result of panic among investors who begin to withdraw their money from banks and stock markets leading to bank runs and instability. Backed by the herding model, the harmful corrupting influence of a small group of investors could lead to massive panic locally and globally. Such scenarios have been noted with the East Asian financial crisis and the 2008 Global Economic Crisis which begun in the USA and spread to most of the global economies (Claessens and Forbes, 2014). In fact, the effect of the crisis was felt more in countries like Greece which are many miles apart. This example illustrates how the COVID-19 pandemic could either trigger multiple financial crises across countries with weak economies, or one weak economy creating a contagion effect across the globe.

Impact on Industries (Multi-Sectoral Impact)

The article titled “Infectious disease and economics” by Smith et al., (2019) assess the effect of zoonotic disease events on multiple sectors. The authors explain that for every pandemic and adverse public health event, there is a resultant socioeconomic impact. With the extensive globalization of modern economies, and extensive international trade and travels, pandemics are likely to cause economic shockwaves. Smith et al., (2019) explain that the private sector is impacted indirectly by such events. However, because of the effectiveness of decision making in the private sector, it is possible for the management to react effectively and work collaboratively with the stakeholders in private and public health systems to respond to the health crisis. The aim of such coordinated efforts is often to reduce the negative socioeconomic impact of the pandemics. This is the case with the Ebola Virus and the Middle East Respiratory Syndrome (MERS) which apart from causing massive economic impact on the economies of the affected regions, stimulated investments in regional and global health security. Smith et al., (2019) further illustrate that outbreak of infectious diseases such as coronavirus has a different impact on different sectors. Collectively, the impacts affect the local, regional and global economies.

The article emphasizes the cost of pandemics on the healthcare system. Pandemics are costly to the health sector since it creates rapid increase in demand for healthcare services than the system can typically accommodate (Smith et al., 2019). The global travel has been acutely impacted due to the missed summer seasons. Forward bookings for the months of March and April were cancelled leading to 40% losses in 2020 compared to a similar period in 2019 (Baldwin & di Mauro, 2020).  The consumer products sector is also affected. The consumer products sector has reported moderate decline in consumption. This is because of the limited export of services around the globe. Regardless, the demand for food has increased as people engage in panic buying. Similarly, the demand for online food services surged during the initial periods of self-quarantine and lockdowns instituted by the government (Carlsson-Szlezak et al., 2020). Online demand grew considerably across sites such as Amazon. However, the shortage of labor hampered efficient servicing and delivery of the orders for consumer products.

As much as some sectors were negatively affected, gold trading registered the highest ever price since 2013 (Ambrose, 2020). On the contrary, oil prices declined during the same period. The industries that are currently working from home include financial service, education, and corporate jobs. On the other hand, health professionals, low skilled workers such as cleaners, retail workers, distributor supply chain, deliveries and drivers are considered as essential service providers.

Policy Responses

To curb the spread of COVID-19, countries introduced a range of policies to protect their economies and citizens against potential contagion. According to Anderson, Heesterbeek, Klinkenberg and Hollingsworth (2020) these policies have had a significant impact on global markets and economy. In general, the policies taken by countries can be classified into four groups, namely; fiscal measures, human control measures, monetary measures and public health measures as summarized in table 1 below.

This section introduces theories and current literature on the effects of COVID-19 on global economies and markets. These theories are applicable in grounding the discussions on the expected impacts of a pandemic on the global economic system. Discussions on the impact of the viral outbreak on multiple sectors and industries is equally presented to further justify the need for research that connects theories and realities creased by the pandemic. The policies response section further highlights how governments, in reaction to COVID-19 have fuelled the impacts of the pandemic on economies and markets.

Table 1: Policy Responses to COVID-19 (Ozili and Arun 2020)

Effect on Stock Markets

The correlation between pandemics, financial markets and world economics remains an underexplored topic. However, pioneering research by Ruiz Estrada, Koutronas and Lee (2020) propose the term ‘stagpression’ to signify the adverse effect of corona virus on world economy and financial markets. In their research, they express the consensus that the global shutdown of economies due to COVID-19 is a leading cause of stock market volatility that could lead to the biggest crash of stock markets since the 21^st century. Historically, such crashes were experienced in 1347 – 1351 in what is known as the Black Death and 1918 – 1919 during the Spanish flu (Ramelli & Wagner, 2020). A common trend is that these events caused consistent, widespread and severe financial disruptions within a short span of time, yet the effects ranged from medium to long term. Since the onset of the virus in China in late 2019, it is estimated that the world economy has lost billions of cash as a result of lost business opportunities and policies such as social distancing and lock down of cities and countries. Restrictions on travel and labor mobility have led to sharp cutbacks in output of economies. These findings are backed by the National Bureau of Statistics which reports on microeconomic indicators of the impact of the pandemic on stock markets.

Financial analysts have alluded that the collapse of stock markets and the resultant rise of commodity prices could be an indicator of an incoming recession. These sentiments are seconded by Shiller (2020) who notes that the pandemic has had huge impacts on stock markets thus creating a financial anxiety as a possible second pandemic. The fear associated with a collapse of stock markets has made investors to lose confidence in financial markets. As a result, stock markets around the globe have been experiencing negative returns. This is attributed to the COVID-19 pandemic which has depleted lifetime savings for most households and individuals. Secondly, there is a lot of uncertainty on the future of economies and their productivity (Baker et al., 2020). This is a serious question that could impact the stability of the financial markets in the years to come. Third, government policies curbing COVID-19 have forced closures thus incapacitating stock markets globally. While answering the question on how stock markets are performing over the past five months since the onset of Corona Virus, DeCambre (2020) reports that the equity market in the USA experienced a turbulent trade period. This trend contrasts fiscal 2019 when the stock markets in the USA registered the best ever annual returns. These illustrations justify that external shocks such as COVID-19 have negative impacts on economic trends. The most affected stocks include S&P 500, NASDAQ, and Dow Jones Industrial Average.

CHAPTER THREE

Methodology

This section will outline procedures and steps adopted by the researcher in preparing, collecting information, sorting, analysing and interpreting the information and data collected. This section will use Saunders research onion model to explore the most applicable research philosophy, approach, design, and sampling methods among other dynamics that will be considered during the actual research. To achieve this goal, this section outlines the research process, while justifying the selection of certain research methodologies over the others. Undertaking these steps will help collect useful information that will contribute towards understanding how Corona virus has affected global markets and economies.

Research Onion Model

While designing the research onion model, Saunders introduced a diagram illustrating the interconnection between different research methods. Referring to the diagram, there are different types of research philosophies. However, the most applicable to this research was interpretivism and positivism research philosophies (Melnikovas, 2018). Interpretivism acknowledges that using observations to collect research data and information can lead to subjective results, therefore, to avoid the negative impacts of biasness on research outcomes, Saunders’s proposed that researchers interact directly with the study population in their natural environment.

Unlike the interpretivist philosophy, positivism acknowledges that researches should have tolerable level of subjectivity since some of the dynamics in the research environment cannot be manipulated or avoided. This philosophy recognizes that research findings could be hampered by factors beyond human control. As much as positivism could merit in directing data collection for this research, it fails to measure up to the research requirement demanding objective findings which justifies why the research will use interpretivist philosophy. Using positivist philosophy in such a case, will derail the research from explaining the real implications of COVID-19 on global financial markets and economies. In addition, the use of this philosophy was discredited on the ground that financial studies require objective findings because they are grounded on strong financial theories. These theories can only be substantiated through objective research. The fact that positivism philosophy encourages personal interpretation and subjective opinions means that using it for this dissertation could potentially fail to justify the theories explaining the impact of externalities such as COVID-19 on financial markets and global economies (Sahay, 2016). Interpretivist covers for these shortcomings by providing realistic findings which can be objectively analyzed to provide an accurate prediction of the relationship between the variables in this research study.

In regard to the research approach, the research onion model identifies two approaches to research, namely deductive and inductive. The deductive approach to research complements the positivism philosophy while the inductive approach matches the interpretivism philosophy. The deductive approach connotes that a researcher should use hypothesis and theories to justify and explore the underlying factors that influence correlation between variables (Saunders, Lewis & Thornhill, 2009). Unlike the deductive approach which requires researchers to begin with the theories and hypothesis, inductive approach begins with observing the trends and making theories or hypothesis towards the end of the research. Given the decision to use to use the positivist philosophy, this research will use the deductive approach where the researcher will use theories on financial crisis to analyze data collected on the effects of COVID-19 on global financial markets and economy. The inductive approach did not merit for this research because of the disadvantages presented by its reliance on a bottom-up approach (Saunders et al., 2009). For instance, using the inductive approach means that researcher will be required to make general observations and narrow them down in order to form a theory on the effects of COVID-19 on global markets and economy.

Research strategies represent the third layer of the onion model. Strategies dictate how the researcher plans and collects data. The most common research strategies include; experiments, survey, case study, action research, grounded theory, archival/ desk research, and ethnography (Saunders et al., 2009). Experimentation is preferred when conducting scientific studies. Survey designs are used with the deductive approach. It focuses on collecting large volumes of data that are analyzed using statistical methods such as SPSS. Another strategy is case study. According to Quinlan et al., (2019) case studies provide unique examples of real-life cases in real world situations. Ethnography entails studying people in their natural habitats or surroundings to understand their culture and behavior. This research deals with financial markets and economy, thus cannot be studied using this strategy. Because of the prevailing restrictions on movements and interactions, it is essential to use a desk research strategy. Walliman (2017) defines desk research as a strategy which derives information from secondary sources of data taken from past researches stored in libraries and online sources. This strategy will be effective since it facilitates access to credible information from reliable source such as the World Economic Forum which presents detailed analysis of financial markets and global economic conditions. The main shortcoming with this strategy is the possibility of being biased or inaccurate since it depends on the ability of the researcher to identify the best and most resourceful archived documents and data from libraries, databases and online.

The fourth layer of the onion model is research choices. According to Walliman (2017) research design provides directions that govern how research is done. This research will use both quantitative and qualitative research designs. Collectively, they are known as mixed methods. It entails using both research designs to overcome the challenges and limitations of using either of the two. Whereas qualitative design relies on logical analysis and explanation of data, phenomenon and concepts, quantitative design is backed by numerical and empirical data.

The fifth layer is composed of research sampling methods. Research sampling entails narrowing the scope of collecting data by limiting the study population. There are numerous approaches to sampling, namely; random sampling, stratified sampling, systematic sampling, convenience sampling, cluster sampling, and stratified sampling. As determined by the research strategies, this research will use the convenience sampling method to complement the desk research strategy. According to Sahay (2016) convenience sampling is easier to apply, yet is the worst approach to sampling. In this type of sampling, the researcher uses readily available information and data. In the case of desk research, it denotes the first group of data on the topic of interest that the researcher accesses. In this case, the researcher will search through the Google search engine to identify the effects of COVID-19 on global markets, stock and financial markets and economy.

The sixth layer of the Saunders onion model is time horizon.  Researchers can use two options; longitudinal and cross-sectional. Cross-sectional horizon provides a snapshot view of situations at a single point and limits the time taken to collect data and conduct research. Longitudinal horizon entails studying behaviors and events over a prolonged period of time. In this case, studying the effects of COVID-19 on global markets, financial markets and economy could take either both of these horizons. In fact, the longitudinal horizon is the most preferred because it will expose the long-term impacts of the pandemic on economies, five or ten years from now. However, because of practicality, the research will be be limited to cross-sectional. This means the research conducted will present a snapshot view of the effect of the pandemic at the moment.

The innermost layer is research techniques and procedures. The procedure for this research will entail identifying secondary sources of data with current information on the effects of Corona virus on global markets and economy. The information will be retrieved from search engines and electronic databases. There is a lot of information on the effects of covid-19 on the different sectors, therefore, the researcher will be required to sharpen the discernment skills so as to use the most reliable data. The qualitative and quantitative data collected will then be organized, collated, and analyzed. The findings and analysis will be detailed in chapters 4 and 5 respectivey.

CHAPTER FOUR

Logistical and Ethical Consideration

The nature of this research will not predispose the researcher to logistical challenges since it will be a desk research. Nonetheless, it raises ethical concerns over plagiarism and credibility. The bottom line is that the researcher should give credit to the authors of the original content. This will be a strategic initiative aimed at eliminating intellectual property claims while also showing the professionalism of the researcher. For this research, all the secondary sources used will be succinctly listed and cited.