A global pandemic is an outbreak in which a disease spreads globally, depending on the pandemics severity (in particular its mortality rate and level of contagiousness) it has the ability to cripple economies and individuals standard of living on a global level.
Previous examples of pandemics include the HIV/AIDS pandemic which occurred in 2005 and claimed 36 million lives (LePan, 2020). The Flu pandemic of 1968 claimed 1 million lives. As globalisation plays its hand and technology rapidly advances in the fourth industrial revolution, we are experiencing unseen and unexplored terrain. One hundred years ago there was no medium in which the world could connect as strongly as it is at this moment in time (MPH Online, 2012).
When humans are infected by a virus, the human body creates anti bodies to fight this disease, however the virus eventually mutates. Meaning humans have little or no immunity to It (WebMD, 2009). The virus spreads easily and quickly from person to person through sneezing or coughing, and in case of the most recent Covid-19 virus, through the infected breathing around others. Viruses can trigger severe illness worldwide, spreading fear, hysteria and an extreme sense of uncertainty for the future . Past flu pandemics reached all parts of the globe within six to nine months (WebMD, 2009). However with the most recent pandemic there has been an exponential spread, starting in Wuhan and reaching globally in just over a month. Covid-19 was declared a pandemic on the 12/03/2020 .
Within the discussion of work and employment, work can be considered as the control of jobs and or occupations that are available such as lawyers, engineers, teachers, hedge fund managers etc. Whereas, employment can be considered as the conditions on which an individual fulfils the job, such as employed, unemployed, full time, part time, contractor or casual. This essay will explore the negative and positive impact of a global pandemic disease outbreak on work and employment in the finance sector. Often when global pandemics ensue, the financial markets begin to crash, creating a trading environment where stocks and securities are extremely volatile.
The Finance sector is a wide spanning portion of the economy. This sector includes banks, investment houses, insurance companies, real estate brokers, consumer finance companies, mortgage lenders, and real estate investment trusts (REITs). The wellbeing of the economy is contingent on the condition of the financial sector. A weak financial sector typically means the economy is weakening (Investopedia “Financial Sector”, 2019). Much of the world perceive individuals whom work within the finance industry as ‘bad’ or ‘immoral’ people with many jobs having negative connotations attached. However, when the finance industry thrives, the world economically thrives. This essay will explore the finance industry as a whole, paying closure attention to the risk management industry and the investment/equity management industry, these two industries have a huge overlap, often seen as brother and sister in the finance industry (Investopedia “Financial Sector”, 2019).
To understand how the financial markets work, it is important to understand the psychology of the individuals whom take part within it. Classical finance assumes all investors exhibit consistent preferences and evaluate information without bias, however, this is rarely the case. Behavioural finances explains how investors’ brains use heuristics (rules of thumb and mental short-cuts) to cope with limited capacity and information. In everyday situations, heuristics work effectively, in unusual contexts heuristics can mislead, such as the finance sector (Investment Analysis, FINA3326). An example of a heuristic is the herd mentality. A bias in which investors essentially participate in ‘Simon says’, copying the investment decisions of other investor, this often causes overpriced securities or under-priced securities (“Herd Mentality – Overview, Examples, Impact of Social Bias,” 2019).
When a global pandemic occurs, panic and fright follows.
As behavioural finance shows, individuals are not consistent with their preferences and do not evaluate information without bias. As a result individuals often deem that they will lose more if they don’t sell their securities. Due to the off-loading of securities, prices of stocks hit all-time lows, effectively minimising any potential profits investors could normally earn without the crisis. Evidence of this is the GFC, in which investors portfolio’s dropped in value by over 30% (Hayes, 2019). While many saw the GFC as a selling opportunity, there were others who saw it as a opportunity to increase their positions in the market at a big discount.
The effects of a global pandemic is exponential, not only in the short term but as well as in the long term. The effects of a global pandemic include: Increases in morbidity, studies show this to be common of low and middle-income countries as vaccines and treatment are often highly priced as companies still place bottom line and profit on their statement of financial position of human lives.
There is almost always severe destruction to the economy in terms of short term fiscal shocks and long term, it took a year and a half for the global financial crisis to cripple the stock market, however, a flu pandemic such as Covid-19 has crippled and seen stocks crash in just 4 weeks.
The world is more interconnected than ever, the buckle and strain in one industry has a knock on effect into others. For example if a pandemic hit, an effect on the hospitality would be as follows. Decrease in foot traffic within restaurant, forcing the restaurant to close due to inability to cover expenses (rent, wages, insurance), the decrease in profit may lead redundancy for many employees, putting the hospitality workers in financial hardship, as a knock on effect the hospitality workers walk into their local bank applying for hardship in order to freeze their mortgage repayments. This in effect ruins the applicants credit rating and represents a loss in profit to the bank (Madhav et al., 2017).
The effect of a global pandemic is always severe as lives are lost, resources are depleted and economies are destabilised. The degree of severity often depends on where the virus originates, how quickly and where it spreads. The effect of Ebola, SARS and MERS on the economy were minimal compared to Covid-19. Covid-19 originated in China, who have one of the largest and fastest growing economies. China is the worlds largest manufacturing economy and exporter of goods, It is also the world’s fastest-growing consumer market and second-largest importer of goods (“China Economy Chinese Economy” n.d.). When China sneezes the world catches a cold.
During a global pandemic confidence in the market is low, with many investors offloading shares. Behavioural finance explains that investors are risk averse by nature and often portray a loss aversion bias in which investors focus more negating loss rather than formulating profits. Investors tend to “feel” a loss more than celebrate a win of the same proportions (“Behavioral Finance – Overview”, 2015). Though confidence is low and markets are volatile, there is opportunity to create wealth and generate profit. There are certain difficulties in trying to catch a falling knife. However, a positive impact of a global pandemic on work and employment may be experienced by hedge funds.
Hedge funds operate within the investment management industry, essentially funds are pooled to invest in alternative assets and or strategies to generate return. Investors have different risk appetites, hedge funds take into account risk appetites therefore the funds can be aggressively or more passively invested. (Gad, 2019)
Hedge funds have an array of different investment strategies such as: Leverage (the use of financial instruments and or borrowed capital to inflate returns), derivatives (financial security with a value that is reliant upon or derived from), underlying assets, short selling, alternative investments and active management (“Hedge funds – Moneysmart.gov.au,” n.d.). Hedge funds opportunity to potentially increase profits during a global pandemic will primarily occur through short selling and long positions on financial instruments such as stocks.
Essentially taking the short position is used when an investor in this case the hedge fund, anticipates a stock’s value to decrease, the intent is to borrow the stock for sale at a high price, then buy them back later at a lower price and furthermore return the stock to the stockbroker (The Long Position -Buy Low, Sell High The Short Position -Sell High, Buy Low, n.d.). On the other hand when stocks hit support level (a level an asset will not go below), profit can be made by a hedge fund taking the “long position”. As the stock is at a low, the intent is that when the market revives (post global pandemic) and business resumes as usual, the stock’s value will increase therefore increasing the return and value created by hedge fund.
Generally if a businesses is performing as a whole, meeting key performance indicators, maximising profits and keeping shareholder value as high as possible, there will be room for expansion, growth and increase in remuneration. Work can be described as the control of jobs/occupations that are available, such as lawyers, engineers, teachers etc. Therefore in the finance sector, more specifically the investment management industry, there will be expansion, with more roles within this industry being available such as CEO’s, Portfolio managers, Traders/Execution Traders, Research analysts, Quants, human resource and legal/compliance teams.
Employment can be described as the conditions on which an individual does the job. This may be on a full time, part time, casual or contract basis. Generally in practice the jobs within the investment management industry will be completed on a full time or part time basis, however, due to the opportunity that the pandemic offers, hedge funds may need to hire more contracted analysts that specialise in investment during times of financial crises.
The positive impact on the investment management industry due to a global pandemic, will definitely be amplified in the short term, as the pandemic is better controlled and the economies of the world starts to recover, the positive impact will subside meaning employment and work will go back to the industries new normal.
There are overwhelming negative impacts on the finance industry during a global pandemic. This is seen especially in the risk management industry. Work and employment is negatively impacted for many reasons such as the sheer amount of claims made by customers. The main types of insurance include, life insurance in which there is an agreement (contract) between an individual and the insurance provider that in case of death the insurer will pay a benefit to said individuals beneficiaries. Income protection is a similar contract in which if the individual cannot work and accrue income due to an accident or illness, the insurer will cover a percentage of the individuals income for a set period of time. A by-product of the pandemic disease outbreak is sickness and death, individuals who fall ill or pass away will in turn trigger insurance clauses. This will primarily be through income protection and life insurance.
The theory of insurance is that the insurance provider, assures payment for an uncertain future event, in return the policyholder, pays a premium to the insurance provider in exchange for that protection on that uncertain future occurrence (Beers, 2019). Premiums vary in amount, this is dependent on the policyholders specific situation, generally if the policyholder is at higher risk, the premium paid is a larger amount. For example the life insurance premium paid by someone with a high BMI such as 35 will pay a higher premium due to higher risk of cardiovascular diseases (“Obesity: BMI calculators and charts,” n.d.). Insurance companies create profit through assuming risk (the policyholders), and diversifying the risk mostly through investing (Ross, 2020). The general work/role types in this industry include: Underwriters, Claims adjusters, Customer service representatives, Claims clerks, Actuaries and Insurance agents (“6 Top Insurance Job Titles and Descriptions,” 2019).
The negative impact on work would see a change in general roles in the insurance industry. Claim clerks would be flooded with claims, underwriters would have more complications in calculating policyholders risk levels. Generally across the board there would be a change in the scope of work completed by employees in this industry.
The negative impact on employment due to a global pandemic disease outbreak would see a decrease in employment within the insurance industry. This would be in large a consequence of the high volumes of policyholder payouts. The payouts will cause a decrease in profit made by the companies within the industry. Historically significant loss in profit results in “restructuring” of company models causing redundancy within the industry. Regardless of the severity and size of the impact on work and employment, it will be experienced more so in the long term rather than short term.
Ultimately it is clear that a global pandemic disease outbreak would destabilise and destroy structure, plans, economies and most importantly lives. The financial industry is a sizeable sector and is the back bone of the economy, impacts on the finance industry whether positive or negative will always have an effect on the economy, especially within work and employment. When pandemic hits and markets crash and become extremely volatile, behavioural finance shows that investors tend to have a herd mentality. This ultimately leads to loss in revenue for investors within the market, however investors who are able to think outside the box and separate themselves from the pack, stand a chance to make profits even in the midst of uncertain times. Positive impacts on work and employment can be seen in the investment management industry. With the correct use of short selling and taking the long position, growth and profits will follow, creating positive impact within the industry. Negative impacts on work and employment is seen in the risk management industry especially in insurance. This is in part due to the high volume of claims for life insurance and income insurance, as the pandemic disease outbreak takes effect on individuals on a global scale. To conclude, though a global pandemic disease outbreak has a net negative impact on the world as a whole, there are some sectors of the finance industry that are impacted positively and some that are impacted negatively in regards to work and employment.