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Markets are falling. Should we panic?

“May you live in interesting times” – this is a quote which is attributed to an ancient Chinese curse! There is no doubt that we live in interesting times today. While global and regional events have always been happening, with social media the speed with which news spreads (particularly negative news) is unprecedented today.

The last three months have been action packed. The strong mandate given to the current government in May, removed political uncertainty and the markets rose 5 to 7% in anticipation of a dream budget.  In addition, it is also important to know about the key economic and market developments under which the budget expectations were built. 

Key economic and market developments

  • The latest GDP and unemployment numbers, showed a definite slowdown in the economy with Q4 GDP growth being only 5.8% in India.
  • Declining trend in discretionary consumer demand. For example,  indicators like car sales are showing a decline of more than 20% Y-o-Y
  • Deficit in the rainfall figures in the month of June, with the deficit pegged at 16%.
  • The threat of a tariff war between US and China has dampened global spirits, and this has had a negative impact on the commodity markets.
  • Tight liquidity conditions in the economy over the last 1 year due to the unexpected credit defaults starting with ILFS fiasco.
  • The new SEBI re-categorization rules which in turn led to significant tilt towards the large cap stocks and thereby negatively impacting mid and small cap stocks

All eyes were on the government and the budget proposals which will help to kick-start the economy again. But contrary to popular expectations, the newly re-elected NDA Government continued to focus on tightening the loopholes and maintaining fiscal discipline. 

The key budget provisions, (or should we say lack of it) which has led to heartburn among the investing community and led to further fall in the markets are:

  • Lack of bold economic reforms like privatization of loss making PSUs etc., in spite of having a clear majority
  • Immediate and urgent measures to counter the slowing economic growth in the form of fiscal or monetary stimulus
  • Higher surcharge on high income earners above Rs2 crores, which again led to thoughts of the Government moving towards socialistic principles
  • Surcharge on FPIs, who were hitherto exempted from that

It is very difficult for all of us to emotionally digest such sustained market corrections/falls in a short span of time. Unlike other asset classes like real estate, equity prices and mutual fund NAVs flash past us every hour which further adds to our anguish! It leads to questions like will the market ever recover in the future.  While we completely understand and share the pain, we would like to reiterate that this is the very nature of equity investing. We have always undergone bouts of volatility and negative sentiments in the past as well. 

What the history tells us?  

In fact, in the past the markets have seen much more steep falls (2008, 2011-13, 2015-16 in the last decade itself) and the bear phase has been endured for years also.  Investing in equity has always been volatile, and this will never change.

In every past correction, the market has rebounded and has yielded much higher returns after the fall. 

Nifty 100 fell 20% between March 15 and Feb 16. In the next 21 months, the markets bounced back 54%.

Multiple such instances are available and the rebound is actually much sharper for mid and small cap stocks.  

While the budget has failed to live up to the market expectations, we believe that all is not lost at the current juncture. 

  • With good rains in July the monsoon deficit has come down to 9% and IMD forecasts that with a good August, the entire deficit will be made up. This will aid the rural economy and help to keep the inflation under check.
  • Brent crude oil has seen a fall in prices to 65 USD/barrel now, which is positive for India as a large oil importer.
  • The RBI has cut interest rates and also indicated that they will follow it with more cuts, if needed. The 10-year G-sec yield has moved down almost 100 bps over the last three months to 6.4 %. Lower bond yields are traditionally good for the equity markets.
  • Government is planning to borrow Rs70,000 crores in foreign currency outside India, thereby further improving the liquidity conditions domestically.
  • The SEBI recategorization is behind us and no further re-allocation by mutual funds are expected.

What should we do now?

As investors, we need to get the following things right.

One, ensure that our asset allocation is right and we invest in equity for our long-term goals only. By long term, we mean giving it 7-10 years’ timeframe.  So, money we have invested in equity for the long run should be retained through these dips.  Enduring notional losses during market downturns is the price we have to pay for high returns from equity in the long run.

Build adequate liquidity to meet your short term needs, if any.  This is not the time to panic and pull the plug, thereby by converting notional losses to actual losses. 

In the long run, the equity markets performance will be primarily driven by the earnings growth of the underlying companies. The long-term prospects of several high-quality companies continue to be bright in India.  The skill of the fund manager in identifying companies with high earnings growth and avoiding pitfalls becomes even more important today.

We cannot hope to avoid the downturns and capture only the upside. Staying invested in high quality managers through cycles has given good returns in the past and this will continue to hold true for the future.  Continue with your SIPs. 

“You make most of your money in a bear market, you just don’t realize it at the time.” – Shelby Cullom Davis

6 Responses to “Markets are falling. Should we panic?

  • Sandeep
    2 years ago

    Gives me a sense of positivity after reading all the negative news about the market and the economy…as you have rightly mentioned it is a cycle and one who is able to endure such cycles will eventually see capital appreciation. There is nothing one will achieve by panicking but instead one should see the opportunity to make quality investments and let time work on the investment. #back2basics

  • Salil Malik
    2 years ago

    Dear Venkat Sir,
    As an investor would like to thank you for reminding us the importance of time and patience when it comes to dividends in Equity.
    You have explained the current economic conditions beautifully. Linking to past you have given us reasons to believe that there’s no need to press the panic button.
    Keep motivating and guiding us!

  • Krishna
    2 years ago

    Play Like MS Dhoni and Take Deep

  • Nagarajan
    2 years ago

    Markets reform itself

  • Prasanna
    2 years ago

    Very informative one Venkat. I think, fundamental investing principle of identifying companies with good potential and corporate governance remains key. Every industry is taking a beat now.

    Thanks for this article.

  • Nice article. It reiterates the importance of staying on course during different cycles of markets. Thanks for sharing

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