Let’s go back and check the severity of the major crashes happened in the last two decades and compare it with the current one so that the panic level should be at the right spot.
2008 Crisis was severe, Nifty50 plunged more than 56% in 11 months, but it took only 23 months for the market to jump 128% to reach to the previous levels. In 2015 due to multiple global reasons, Nifty50 plunged more than 22% in 12 months, but it took the same time (12 Months) for the market to jump 28% to reach the previous levels.
Five points logical analysis
- There have been six instances, in the last two decades, of correction of more than 25%. Out of these, in four instances, the correction was to the tune of over 30%. In all four instances, six-month forward returns for Nifty were positive while in three instances returns have been a minimum of 35% and a maximum of 46%.
2. After the steep correction of 28%, several data points indicate markets are closer to the bottom of the current correction phase. Historically, investing post 30% correction has yielded handsome returns over one year period for investors.
3. Market cap to GDP Ratio (%) or Buffett Ratio talks about overall market valuations (undervalued or overvalued) compared to a historical average. Typically, a result that is greater than 100% is said to show that the market is overvalued, while a value of around 50% is said to show undervaluation. If the valuation ratio falls between 50 and 75%, the market can be said to be modestly undervalued. So, here we are, close to undervalued.
4. If history is to go by, markets usually rebound the most in 3–6 months post sharp corrections. Except for one instance during the Tech meltdown of 2000, markets have delivered positive returns in the subsequent 12-month period. On average, it takes about 156 days between peak to trough — the lowest has been 35 days in 2006 and the highest 410 days in Nov 2010-Dec 2011.
5. Nifty 12-month forward P/E of 15.1x is at a 12% discount to Long Term average of 17.2x (March 2005) and at levels last seen in February 2014. At 2.0x, the Nifty 12-month forward P/B is also well below the historical average of 2.6x. We have assumed a 10% cut in our FY21 Nifty earnings estimates to account for the disruption due to the global pandemic. The instances when the number goes below this average, global buying opportunities born.
In any healthy economy, bondholders typically demand to be paid more — or receive a higher “yield” — on longer-term bonds than they do for short-term bonds. That’s because longer-term bonds require people to lock their money up for a greater period of time — and investors want to be compensated for that risk. Aug 2019, I discussed about inverted yield curve (see here) which usually signals trouble in the economy ahead, Corona worked as a catalyst and the world is now experiencing the downfall.
Five points Rescue plan for Investors.
- Now is always the best time to buy stocks if you are a long-term investor. Regardless of whether you buy tomorrow, in 2 weeks or 2 years, markets will rise long-term. So don’t worry about whether you buy the Nifty at 8,000 or 5,000. Look at any long-term graph of the markets. Bad news can only halt the market, can’t stop the market. Never!
- Average your holding only when you are pretty sure that Nifty50 will experience a Golden Cross along with RSI crossing above 30 (upside). Till then stay away from fresh buying or panic selling.
3. A virus or terrorist attack (9/11 and the like) won’t affect market profitability long-term. Can we see some individual firms go burst like airlines or high debt firms go bust? Maybe but that is beyond the point if you are invested in the whole market in a diversified portfolio.
4. Avoid rumor based analysis and believe in number based analysis. Peak and trough are just part of the strategy. The night is darkest just before the dawn.
5. Health is the greatest wealth we have, which can be preserved even in the time of greatest economic crisis because the market is not in our hands but our health is. So, enjoy staying at home for a few days, don’t panic, avoid public gathering, wash your hands in every short while and don’t check your portfolio every hour (this won’t help).