Should more countries follow Philippines in shutting down markets?

As trillions of dollars get wiped off, investors are wondering if stock markets should be shut temporarily to prevent further wealth erosion.

On Monday, Philippines became the first country to indefinitely halt trading in financial markets to insulate them from the meltdown caused by the coronavirus pandemic.

This is not the first time that trading was suspended. US markets were kept closed for a week after the terrorist attacks in 2001 (9/11). Similarly, Greece had shut its market for more than a month during the European debt crisis in 2015.

So is suspension in trading an option for regulatory authorities?

The jury is out. Those opposed to the view say it closes exit opportunity for investors, while those in favour  say markets can take a break till the coronavirus outbreak eases.

G Chokkalingam, CEO, Equinomics Research & Advisor says, a large market like India can never do that. “It will destroy the credibility and hit foreign investor sentiment.”

Stacey Cunningham, President, NYSE, took to twitter opposing the move. “It is important for the markets to remain open, and for them to function in a fair and orderly manner, as they have been. The market is a reflection of the larger uncertainties that everyone is experiencing during these challenging days. Closing the markets would not change the underlying causes of the market decline, would remove transparency into investor sentiment, and reduce investors’ access to their money. This would only further compound the current market anxiety,” she said.

In recent weeks, most global markets have plunged by over 20 per cent with $15 trillion of investor wealth getting shaved off. Market players say investors are finding it difficult to price assets given the economic uncertainty caused by the virus.

However, there are some analysts who appear to be in favour of Philippines’ move.

 “If the situation improves, this (shutdown) could work out positively for the market and reduce the volatility in the short term as it did China even if the market returns to some adjustments initially. The drawback would be if the situation continues to worsen, that could see to further panic selling when the market reopens," Jingyi Pan, market strategist, IG Asia told Bloomberg.

"I think it is smart move because the market is already in hysteria. Sometime taking a step back allows investors to rethink their position and digest the flood of information out there. This is a health crisis we are facing and it seems the market reaction has been too exaggerated," Jonathan Ravelas, strategist, BDO Unibank told Bloomberg.

“Think of it as a circuit breaker on steroids. There is rampant fear at the moment as evidenced by the unprecedented volatility. The suspension will hurt those who rely on trading for an income but will provide time for participants to calm down and evaluate the situation rationally. A weekend is hardly sufficient for that," says Justin Tang, head of Asian research, United First Partners told Bloomberg.

However, some believe the fall in the market is adequately reflecting the impact of lockdowns, travel bans, social distancing measures and other disruptions.

“The markets are pricing in possible deflationary impact of the coronavirus spread. There is no match to what is happening, where both supply and demand have been hit. During the Lehman crisi, there was no ban on travel only the confidence in the financial system got shaken. Coronavirus has disrupted many segments of the economy,” says Chokkalingam.