Indian economy is going through a sharp downswing. It is a fact that the slowdown has turned out to be sharper than everyone expected. Even institutions rich in economic talent – IMF, World Bank, OECD, our own CSO, RBI, and Investment Banks – got their growth forecasts wrong. FY 20 projected GDP growth is now at 5 percent: this would be an 11-year low. Now there is a consensus that growth has troughed out and recovery will begin in the next couple of quarters.
It is important to understand the cyclicality of economic growth and markets. Growth and market movements have never been linear; they are always cyclical. Some cycles will be short and some long. For developing economies, the long-term growth trend will always be up but this long trend will be punctuated with dips- some sharp and some shallow. Take India’s growth trend after the initiation of liberalization in 1991. During 1992-2019 India has been the second fastest growing large economy in the world with an average growth rate of 7 percent. However, this long-term trend was punctuated with dips in growth in 1998 (Asian Currency Crisis), 2000-02 (Tech bubble burst and Global Recession), 2008-09 (Global Financial Meltdown and the Great Recession), 2013-14 (Taper Tantrums and EM crisis). And now, we have this sharp slowdown caused by a combination of issues like the banking crisis, NBFC crisis and real estate crisis. This downturn, too, shall pass and the economy will revive. The several stimulus measures – monetary, fiscal and sector specific – initiated by the government will start yielding results soon.
It is also important to understand that markets and different asset classes move in cycles. Investors are familiar with the boom and bear phases of markets. If we take the last three decades in India, we had bull markets in 1992, 1994, 1999, 2003-08, 2014 and short duration spurts in many other years. Also there has been bear phases, some of them long like the 1997-2003 severe bear phase. The most important takeaway from these cycles is that downturns are temporary, revival is inevitable and the long-term trend is always up. From the near $300 billion GDP in 1991, now we are close to $ 3 trillion GDP. And the Sensex has soared all the way from 1000 in 1991 to around 42000 now.
Another important takeaway from investment history is that the best time to invest is not when everything looks good. On the contrary, bad times for the economy have turned out to be good times to invest. In 1991 India faced a major economic crisis; during 2000-03 growth was poor; in 2008 the economy was impacted by the Great Recession and in 2013 Taper Tantrums and policy paralysis at home impacted the economy. In retrospect, those dismal times were excellent times to invest. Investors can learn lessons from this investment history.
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