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Interview: Financial Markets in Times of Crisis

How badly will the financial markets be affected by the Corona crisis? That’s what we asked our HSBA professor and academic head of the MSc Finance, Prof. Dr. Peter Scholz

How badly will the Corona crisis hit the financial markets and the stock exchange?  

At the moment this is still difficult to estimate. The DAX lost almost 40% at one point but has now recovered noticeably. Market participants are currently very much hoping for the V-scenario, i.e. a severe but short recession and a rapid recovery. The longer the current lockdown situation lasts, the more serious the consequences. Right now, it looks like some  of the more strict regulations are going to be lifted which will help regional retailers in particular. What the long-term consequences for the SME sector, the German economy’s backbone, will be cannot be fully assessed yet. However, a new lockdown would probably hit the staggering economy hard. If we quickly return to a "new normality", the stock market will cope better. A new lockdown will result in further price falls.  

Who are the winners of the crisis, and who are the losers?  

Almost everyone is a loser. What we tend to forget at times is that the economy ist not just made up of big businesses. We are all part of the economy. We are all part of the economic cycle, and when it is disrupted so massively as it is currently, it is primarily jobs, savings, pension entitlements, and so forth that are lost. The longer the restrictions continue, the worse the consequences. If the number of insolvencies increases, this will at some point trigger cascading effects that won’t be controlled by Olaf Scholz's "Bazooka". The economy is a system based on trust. It cannot be switched on and off at will.   

Naturally, the crisis hits hardest those industries that live from customer contact and companies that are not in the spotlight and therefore perhaps have more difficulty in obtaining financial aid.  The few winners are the big online and digital groups such as Amazon, Facebook, Netflix, but also a few smaller players such as Teamviewer. The pharmaceutical companies that find a vaccine against COVID-19 will certainly be among the winners on the stock market.  

Does this crisis compare to the 2008 financial crisis or is it going to be worse?   

The financial market crisis of 2008 mainly affected the demand side; this crisis affects both sides, supply and demand. In this respect, it is a new crisis. It will therefore be much more complex, or expensive, that is, to manage the consequences. There is also the question of trust and how it will develop in this current system. If people have worries about the future then demand will be harder to stimulate. And the question is how much infrastructure on the supply side has been destroyed. It also remains to be seen how much money the state will have to spend to mitigate the consequences of this daring experiment. After all, the money is taxpayers' money, which means that it does not come free. I wouldn't be surprised if a kind of “Corona solidarity tax” will be introduced. It is already becoming apparent that the economic slump will be more severe than in 2008. In the long term, the economy will find a way to recovery, but in the short term it may be very painful.   

What are remedies now and in the future to contain the crisis and revive the economy?  

The best way to contain the economic crisis is to lift current restrictions as much as it is responsible. However, the damage has already been done and once financial aid runs out the situation will be difficult for many companies. In Hamburg, for example, customers have not returned to the shops despite them having reopened. Many economists therefore expect a wave of bankruptcies from autumn onwards. The answer will be the same as in the past: pump liquidity into the system and increase debt. Nevertheless, there will be distortions that cannot be absorbed. The economy is too complex because even if only small parts of it are stopped there are conseqences on many other parts of the economy. And in the current situation many, many parts of the economy have come to a standstill. Our welfare state with all its positive aspects currently does a lot of good, in principle: support to workers in temporary positions (Zeitarbeit) are, of course, helpful, but only in the first few weeks up to a few months. Parents must also be given the opportunity to return to work by opening schools and nurseries. The multiple burden on families is really discerning.  

What will the long-term effects be? Are there any positive ones, especially with regards to digitalisation?  

Clear and professional concepts on how to deal with such a crisis are pivotal in future. In this current crisis, first there were no measures taken and people were able to go to après-ski and parties as if no one had reported about any virus; then we went into a strict lockdown and even places that didn’t need to be locked down were closed.  And, there were inconsistencies by closing the retail trade but keeping  chains open. The fact that there were no strategic reserves in facial masks, protective suits or  disinfectants is still worrysome. Covid-19 is a serious disease. But what would it have looked like if we had experienced a novel virus similar to Ebola? We do not only need a concept for disease control, but also how living economically looks like in concrete terms. Ideas like hibernating an entire  economy must not be tested in an actual crisis. As far as digitalisation and working from home are concerned, I hope that these positive aspects will remain after the crisis. 

 

Prof. Dr. Peter Scholz
Prof. Dr. Peter Scholz

Prof. Dr. Peter Scholz 

has been Professor for Business Administration Theory with a focus on banking at HSBA since 2013. Furthermore, he is the Academic Head of the MSc Finance. Previously he worked for over ten years in investment banking and in the private customer business – as a portfolio manager at Deka Investment in Frankfurt am Main and as a derivatives trader and securities specialist at Deutsche Bank.

After vocational training as a finance assistant at Deutsche Bank and studying Betriebswirtschaftslehre (business administration) at Tübingen University, Peter Scholz completed his doctorate at the Centre for Practical Quantitative Finance in Frankfurt School of Finance & Management, where he still gives lectures on finance.

Professor Scholz has presented his research findings on investment certificates and timing strategies at several international conferences, including the Research Conference ‘Campus for Finance’ at WHU Vallendar, the Midwest Finance Association in New Orleans and the Southern Finance Association in Charleston.