Question

Subject: This is a timely discussion given the current global events surrounding the pandemic, Markets are interconnected and can be fragile. The US stock market is down again today, based on Congress not passing the proposed stimulus. If it is passed, the Dow may go up again-world events can have dramatic Impacts. For companies doing business in other countries, due diligence and research must be conducted in at risk countries which could include natural disasters or corrupt governments or civil war. American companies do business in many conflict zones, including Iraq and they take a much greater risk than normal. A cost-benefit analysis is the key before entering into a risky market. what are some mitigation techniques companies can employ?

Answer 1

Hello,

Due to the current unforseen pendamic going on in the world, it has really became riskier to invest anywhere. I further believe that the whole world market is waiting for a vaccine to defeat the COVID-19.

Further, companies in the US also faces the risk of Civil war with increasing tensions with Iran and other sudden decision of President Trump. The volatility as seen in the world market had never been witnessed ever in the past.

First let me tell you that the volatility in the market is not the risk, its just the manifestation of the risk. When something is volatile then it becomes riskier.

In order to mitigate the risk of investing in the market, following things shall be kept in mind.

1.The risk shall not be concentrated.

You should not invest in a particular country or in a particular sector, so as to avoid the risk of getting a hit, once on your entire capital.

2. Inflation risk and risk of Interest rate

As per ongoing risk in the world market, the central bank of each country are playing with the Interest rate (reducing), so as to manage the Inflation in the country. In order to mitigate such risk of interest rate and consequential inflation rate, iy is advised to pull sharply the investment or to reduce investment in Bank, NBFC, auto sector, sensitive to interest rates.

3. Risk of Currency

The risk to currency exchange rate is also high as per the ongoing virus exposure resulting into pendamic situation in the world and in order to mitigate such risk, one should invest in the business which is limited to within country and has very less currency risk exposure.

4. Don't think of short term investment during the pendamic times

Wareen Buffet says that one should invest in a company with a mind set that the market will be closed for next 10 years. The investment shall be for the long term, so that you outplays the volatility.

5. Liquidated investment

Once should always invest in liquidated fund so that the at the time of panic, no fund shall be stucked due to liquidity.

6. Invest in ever green business profile

It has been observed at the time of disrupty in the whole world, be it pandemic, crisis, civil war, the company deialing with basic essential goods and services doen't get effected by such.

Trust the above answers your queries.

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