New Covid-19 variants in China, US inflation, high oil prices, geopolitical tensions, — all these and more have impacted investor sentiment, with the Sensex and Nifty declining 9 per cent in the first six months of 2022.

But instead if pulling back, this could be a time to accumulate deeply undervalued stocks. A steep market correction often offers good potential for appreciation. How markets responded to periods of low growth in the past could provide important lessons for future.

Fiscal 2002-03

The economy slowed down sharply in fiscal 2002-03. But the stock market exited calendar year 2002 with gains. The Sensex rose 3.5 per cent to reach 3377.28. These gains continued into 2003, with the Sensex zooming 73 per cent to reach 5838.96. In fact May-June 2003 was a trough from which the indices kept rising.

Despite growth decelerating, investors remained optimistic about the economy posting healthy growth in the next fiscal year. Investor sentiment was also supported by expectations of solid earnings reports from big companies, which had taken cost-cutting measures during the slump.

While FIIs’ interest in India was limited in this period, and fiscal deficit was high at 5.28 per cent of GDP in FY03, domestic investors were quite bullish on the economy.

Fiscal 2008-09

Against the backdrop of the Global Financial Crisis, India’s GDP growth fell sharply from 9 per cent in the previous fiscal year. In the first two quarters of 2008-09, the economy grew at 7.8 per cent and 7.7 per cent, respectively and then declined to 5.8 per cent in the third and fourth quarters.

There was a steep correction in the stock market, with the Sensex slumping to 9328 in 2009.

However, this market contraction was short lived, with markets gaining 17 per cent through 2010 and Sensex closed the year above the 20,000 mark.

Though India suffered the downside of the subprime crisis indirectly (Current account deficit to GDP ratio fell to -2.33 per cent, import cover fell to 9.8 months, fiscal deficit rose to 5.84 per cent and FIIs pulled out ₹52,987 crore) India’s GDP held up well at 7.7 per cent in CY08. This was proof of the economy’s resilience and recognising this FIIs returned in CY09 investing a net sum of ₹83,431 crore.

Fiscal 2020-21

This was the year when Covid-19 put breaks on the global economy. Amid widespread lockdowns, the Indian economy contracted by an unprecedented 7.3 per cent in fiscal 2020-21. But stock markets posted their highest annual gains since 2017, with Sensex and Nifty 50 gaining around 16 per cent 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 cover also remained high at 17.4 months. But fiscal deficit worsened to 8.89 per cent due to higher public spending.

Lessons learned

Market resilience: Bad news drive markets down, but eventually the bad news gets priced in, shares become undervalued, and stocks begin to record gains.

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

Between July 1991 and May 2014, India’s equity markets gained 14.5 per cent per annum, while the world stock market index rose by a lower 12.7 per cent. Similarly, from May 2014 till July 2022, the stock markets rose 12.6 per cent a year, while the global stock market index gained 10.8 per cent.

Long-term stability: There may be market volatility in the near term. But over the longer-term, the Indian equity market has been steady, stable, uptrending and resilient.

Corporates’ resilience: During tough phases, companies aggressively look for ways to cut costs and improve bottomline. They also launch innovative products and services to drive revenues. These measures have long-lasting effects, increasing the operational efficiency and sales for years to come.

It is natural to be worried when growth declines. However, investors need to remember that India’s stock market has been through far worse. Today, India has emerged as the world’s fastest growing major economy, with GDP growth of 8.7 per cent in fiscal 2021-22 and expected growth rate of 7.0-7.2 per cent in 2022-23.

In volatile times investors need to remember that things will improve over time so knee jerk reactions need to be avoided. But they however should also be careful about the stocks they invest in as despite recoveries in the above periods, many stocks have languished or disappeared from the listed universe.

Investing a large portion in large-cap stocks or large-cap index funds is advisable.

During market slumps accumulate stocks, MF units in a staggered manner and bring down equity allocation in a systematic manner when indices/stocks rise steeply. Investors should also go up the quality/capitalisation curve as the bull run keeps entering higher phases.

The writer is Head of Retail Research, HDFC Securities

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