Stock markets: learning from the past


New variants of Covid-19 in China, US inflation, high oil prices, geopolitical tensions, – all of this and more have impacted investor sentiment, with the Sensex and Nifty down 9% over the past six first months of 2022.

But instead, if you pull back, it could be a time to accumulate deeply undervalued stocks. A strong market correction often offers good upside potential. How markets have reacted to periods of weak growth in the past could provide important lessons for the future.

Financial year 2002-03

The economy slowed sharply during the 2002-2003 fiscal year. But the stock market left calendar year 2002 with gains. The Sensex rose 3.5% to 3377.28. These gains continued into 2003, with the Sensex climbing 73% to 5,838.96. In fact, May-June 2003 was a trough from which the indices continued to rise.

Despite slowing growth, investors remained optimistic about the economy showing healthy growth over the next fiscal year. Investor confidence was also supported by expectations of strong earnings reports from large companies, which had taken cost-cutting measures during the crisis.

While FII interest in India was limited during this period and the budget deficit was high at 5.28% of GDP in FY2003, domestic investors were rather optimistic about the economy.

Financial year 2008-09

Against the backdrop of the global financial crisis, India’s GDP growth fell by 9% in the previous fiscal year. During the first two quarters of 2008-2009, the economy grew by 7.8% and 7.7%, respectively, then fell to 5.8% in the third and fourth quarters.

There was a sharp correction in the stock market, with the Sensex dropping to 9328 in 2009.

However, this market contraction was short-lived, with markets gaining 17% through 2010 and Sensex closing the year above the 20,000 mark.

Although India suffered indirectly from the setback of the subprime mortgage crisis (current account deficit to GDP ratio fell to -2.33%, import cover fell to 9.8 months, fiscal deficit increased to 5.84% and FII withdrew ₹52,987 crore) India’s GDP held up well at 7.7% in CY08. This was proof of the resilience of the economy and acknowledging that FIIs returned in CY09 by investing a net sum of ₹83,431 crore.

Financial year 2020-21

This is the year that Covid-19 put a damper on the global economy. Amid widespread lockdowns, India’s economy contracted by an unprecedented 7.3% in the 2020-21 financial year. But stock markets posted their strongest annual gains since 2017, with Sensex and Nifty 50 gaining around 16% in 2020.

Foreign investors continued to be bullish on India with Foreign Investment to GDP ratio at 3.01 and FII inflows at ₹1,70,262 crore in CY20. Import coverage also remained high at 17.4 months. But the budget deficit worsened to 8.89% due to higher government spending.

Lessons learned

Market Resilience: Bad news drives markets lower, but eventually gets priced in, stocks become undervalued, and stocks start to post gains.

Outperform global markets: The Indian stock market has outperformed the rest of the world over the long term.

Between July 1991 and May 2014, Indian stock markets gained 14.5% annually, while the global stock index edged up 12.7%. Similarly, from May 2014 to July 2022, stock markets rose 12.6% annually, while the global stock index gained 10.8%.

Long-term stability: There could be short-term market volatility. But longer term, the Indian stock market has been flat, stable, bullish and resilient.

Business Resilience: During tough times, businesses actively look for ways to reduce costs and improve results. They also launch innovative products and services to generate revenue. These measures have lasting effects, increasing operational efficiency and sales for years to come.

It is natural to worry when growth declines. However, investors should remember that the Indian stock market has seen much worse. Today, India has become the fastest growing major economy in the world, with GDP growth of 8.7% in FY 2021-22 and a projected growth rate of 7.0 to 7.2% in 2022-23.

In times of volatility, investors should remember that things will get better over time, so knee-jerk reactions should be avoided. However, they should also be careful about the stocks they invest in because despite the rallies during the above periods, many stocks have languished or disappeared from the listed universe.

It is advisable to invest a large portion in large cap stocks or large cap index funds.

During market declines, accumulate stocks, MF shares in a staggered fashion and reduce stock allocation systematically when indices/stocks rise sharply. Investors should also move up the quality/capitalization curve as the bull run continues to enter higher phases.

The author is Head of Retail Research, HDFC Securities

Published on

August 21, 2022


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