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How long will this bear market last?

Lokeshwarri SK | Updated on October 07, 2019

Indian equity market has been in a bear’s grip for 20 months now. How much longer will this last? To what low can prices fall? We analysed market corrections since 1979 to get some answers

Of all the animals that stalk the corridors of the stock market, the bear is perhaps the most feared. Not without reason, for it can wreak havoc with investors’ portfolio, shake the confidence of policy-makers and instil a feeling of gloom all around.

For some time now, investors in Indian equities have been asking the question: “are we in a bear market?” The condition of investors’ portfolios reeks of a bear market, but the benchmark indices signal otherwise.

Unfortunately, there is no standard definition of a bear market in stock market lexicon. The most widely followed rule to identify a bear market is if market benchmarks decline 20 per cent from their peaks. Going by this definition, Indian equities are not in a bear market. Despite this deviation, we believe that the bear has been controlling the Indian equity market since the beginning of 2018; for 20 months now.

That brings us to the next few questions: How long will this bear market last? What will be the extent of wealth erosion for investors? Which category of stocks show more resilience in such intense downturns?

Forecasting the market’s direction or movement is a near-impossible task. But thankfully, history tends to repeat itself in stock markets, resulting in similar patterns evolving in price movements across time periods. Studying empirical data therefore helps shed some light on future movement. We analysed price behaviour in previous market declines, since 1979, to find some guide-posts to help us navigate through this difficult phase.

The beginning

Bear markets or market corrections are distribution phases that remove the excesses in stock price movement created by the previous rallies. The corrections typically take two forms. One, where the fall is big in magnitude but the time-span of the correction is short, similar to that witnessed in 2008. Two, the magnitude of the fall can be small, 30 per cent from the peak or even less, but the time taken can be long.

The Indian market is going through the second kind of bear market currently; it began in February 2018 with the re-imposition of long-term capital gains tax on equity in the Budget and the beginning of US-China trade war in the first week of February 2018.

The Nifty 50 does not reflect this bear phase accurately. While the index has been volatile, it recorded fresh life-time peaks in September 2018 and again in June 2019. But there are other indicators that point towards a peak in January 2018.

Yes it’s a bear


We have arrived at the starting point of the correction by looking at the movement in Nifty mid- and small-cap indices. Both indices peaked in January 2018 and were down 26 and 42 per cent respectively by the end of September 2019.

Besides this, it can be observed that the total market capitalisation of the BSE and the NSE is currently below the peak recorded in January 2018. Similarly, cash turnover in the market peaked in the first quarter of 2018 and has not hit new peaks since then.

But the defining feature of a bear market is that majority of stocks should record losses in such phases. According to Robert Prechter, 70 per cent of the stocks move higher in a bull market while 90 per cent of the stocks decline in a bear market.

If we apply this simple logic, we are clearly in a bear phase. Eight out of every ten traded stocks have registered losses between January 2018 and September 2019. Seven out of ten stocks have lost over 25 per cent of their value and around one-fifth have lost over 75 per cent of their value. There were only a handful of multi-baggers.

Clearly, the Nifty 50 (up 2.71 per cent) and Nifty 500 (down 5.61 per cent) since January 2018 are camouflaging the pain felt in the broader market. These indices are not reflecting the true state of affairs due to, one, the flood of money moving into large-cap mutual funds and, two, the EPFO money that is keeping larger stocks buoyed.

An analysis of the market capitalisation changes between January 2018 and September 2019 shows that the top ten stocks accounted for 30 per cent of the market capitalisation in September 2019. These 10 stocks — including TCS, Reliance and HDFC Bank — gained 17 per cent in this period, thus lifting the large-cap heavy indices.

How low can it go?

Having established that we are in a bear market, what is the extent of loss that investors can expect in this phase?

To answer that question, we need to understand there are secular as well as cyclical trends evolving in the stock market simultaneously. Secular trends are long-term in nature, extending beyond 10 years. The secular trend in Sensex is up from 1979. Each correction within this trend has been followed by a higher peak, establishing the positive long-term trend.

Within this secular trend, there are cyclical bull and bear markets that last from a few months to a few years. We are currently in a cyclical bear market.

If we consider the movement of the Sensex since 1979, there have been four instances of short and deep cyclical bear phases. Spanning the last quarter of 1990 and the first quarter of 1991, when India faced the balance of payments crisis, the Sensex declined around 40 per cent in just three months. In 1992, post-Harshad Mehta scam, the decline was 56 per cent in 12 months, while the dot com bubble caused the Sensex to lose 58 per cent in 19 months. The most severe decline in the Sensex was after the sub-prime crisis, in 2008, when the decline was 62 per cent in 13 months.

There have been four instances prior to the current one when the sideways move extended beyond 20 months. The cut in the sideways phases was restricted to 3 per cent in the 1982-84 correction and 17 per cent in the correction from November 2010 to August 2013. But the fall got quite severe in the 1986-88 period and again in the 1994-1998 correction; the decline was around 40 per cent in both periods.

Compared to the above phases, the Sensex has gained 6 per cent, up to September 2019. But as explained above, large-cap indices are not reflecting the true picture, currently. We, therefore, compared the movement of the mid- and small-cap indices in recent corrections to understand the extent of possible downside.

Since the data for mid- and small-cap indices is not available for periods prior to 2000, this analysis had to be restricted to corrections after 2000.

Between November 2010 and August 2013, the Nifty mid-cap index lost 36 per cent. The cut was much smaller in the 2015 correction at 17 per cent. The Nifty small-cap index declined 45 per cent between November 2010 and August 2013 and 29 per cent in the correction in 2015. But the cut in both the indices was much deeper in the 2008 crash — 70 and 77 per cent respectively.

The decline in Nifty mid- and small-cap Indices in the ongoing correction, since January 2018, is 27 per cent and 45 per cent respectively, which is on par with the extent of the fall after November 2010 and more than the decline in 2015-16.

The inference: the good news is that in the last 20 months, the value of mid- and small-cap stocks has been eroded considerably. Large-cap stocks have so far been buffered by EPFO and MF buying. So unless domestic and global conditions worsen considerably, there may not be too much downside in mid- and small-cap stocks from these levels. The decline in large-cap indices, including the Sensex and Nifty 50, could be restricted to around 10 per cent.

The above prognosis is based on the assumption that this is a consolidation phase in a secular bull market, which will be followed by another leg upward.

This view will, however, be negated if there is a sharp global sell-off similar to the 2000 or 2008 crash. In that case, this sideways move will be construed as the final distribution phase in a bull market, that can be followed by a plunge, up to 30 percentage points from the current levels, in large, mid- and small-cap indices.

How much longer?


The next question that needs to be answered is, how long will the ongoing correction last? The current bear phase has already lasted for 20 months. Previous sideways moving phases averaged 30 months, if we exclude the correction between August 1994 and September 1998 that went on for 50 months.

So the current phase can extend another 3 to 4 quarters, up to the second half of FY21 if it is a typical sideways bear market. The Sensex and the Nifty could then break higher, past the current life-time highs.

The probability of the sideways move extending beyond three years is rather rare. But if it does, then there will be plenty of trading opportunities, as the market fluctuates within a broad range for an extended time. Long-term investors could, however, find this phase frustrating as the portfolio value stagnates in such periods.

Stocks to bank on

What are the stocks that can help you navigate this phase the best? To get the answer, we studied the stock price movement of three recent bear phases – between January 2008 to March 2009; November 2010 to August 2013 and the current phase.

The answer — big is the most beautiful. The largest stocks, in terms of market capitalisation, have managed to weather the downturn better than others. This has been very stark in the period between January 2018 and September 2019, when the top ten stocks increased their market capitalisation by 17 per cent and the top 25 by 5 per cent.

In the correction between November 2010 and August 2013, the top 10 stocks witnessed market cap decline of 9 per cent even as the large-caps lost 22 per cent.

On the other hand, the market cap erosion in bear phases is much more severe in mid- and small-cap stocks when compared to large-caps. If the decline gets intense, smaller stocks suffer more. This was witnessed in 2008-09 correction when small cap stocks lost 70 per cent of their market capitalisation, while large caps lost 54 per cent.

In short, safety seems to lie in the largest stocks by market cap at this juncture. Exposure to small- and mid-caps can be limited, for few more quarters.

Being prepared is job half done

As stated at the outset, predicting the market moves with accuracy is not easy since there are too many factors impacting prices. But being aware of the risks can help us prepare the investment strategy accordingly.

Based on the above analysis, two scenarios emerge. One, that the phase from January 2018 is a correction in a bull market that can take prices higher over the next two to three years. In this scenario, the price correction may be limited to the current levels, with a little more downside in large-caps. But prices can remain sideways for few more quarters before the up-trend resumes.

Two, the more bearish scenario is that, this is the final distribution phase of the bull market, with a sharp cut in prices to unfold soon. There could be severe erosion in prices of all stocks – up to 30 percentage points lower from the current levels.

If we consider domestic factors alone, the economy could begin to pick-up from FY21, if the Centre moves the right levers and sorts the mess in banking sector, and that ties up well with scenario 1. But the global conditions are pretty precarious now, with growth slowing and the threat of deflation looming in developed economies. The trade war is only exacerbating the situation.

Given that the flood of easy money pumped by global central banks has been keeping the global stock markets afloat, the possibility of a severe decline similar to 2008 or 2000 cannot be ruled out as the pile of global debt is deleveraged.

This extremely bearish scenario of the current phase ending in a crash in stock prices can, however, prove to be a blessing in disguise as it would bring this protracted sideways move to an end and create new buying opportunity. As the saying goes, every end is a new beginning.

Published on October 05, 2019

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