The coronavirus pandemic has rocked global economies and triggered a widespread liquidation of stocks as an asset class. Since the appearance of the first cases of coronavirus in late 2019, global markets have fallen sharply. The Dow Jones Industrial Average (DJIA) and the S&P 500 ended their 11 years of bull running – the longest in history – while the S&P BSE Sensex and the Nifty 50 also entered the bear market with a fall more than 30 percent each. A decline of 20% or more in a stock or index is generally considered to be a bearish phase for that trading unit.
A recent analysis by Jefferies, a global research and brokerage firm, said that 18% of the stocks that make up the Nifty 100 and have a long trading history have recently traded below their assessment of the global financial crisis ( GFC). The market collapse also saw 84% of stocks fall below their five-year valuation and 78% below their 10-year average valuation. The Jefferies report stated that in the Nifty 100, several state-owned companies such as State Bank of India (SBI), GAIL, ONGC, NTPC, Bank of Baroda (BoB), Punjab National Bank (PNB) and Power Finance Corporation slipped under GFC. low. Adani Ports, ITC, Tata Motors, Shriram Transport Finance, DLF and Zee Enterprises among the private companies are below the lows of the GFC.
Meanwhile, analysts have lowered their global growth forecasts. Morgan Stanley and Goldman Sachs expect the global economy to go into recession if the coronavirus is not brought under control soon. Worryingly, BofA Securities believes that the US economy is already in recession. Most asset classes should therefore remain under pressure – at least for now, analysts said.
So, how long will the pain last and could the coronavirus pandemic be the end of generating a healthy return on stocks as an asset class?
Most analysts disagree.
“It is not the end of investing in stocks. We have seen such situations repeatedly over the past two decades. With respect to COVID-19, there is now a need to monitor new cases in the United States, Europe and India. Developments in these geographic areas will decide the trajectory of the markets from here. Generally, when the markets fall so quickly, there is some support once they have slipped 25-30% from the top – and this is where we are now in terms of the current market. The most significant correction phase in history was a drop of about 60% from the 2008 peak at the GFC. The corresponding level is now around 6,000 on the Nifty, which should serve as an absolute support base, “explains U R Bhat, CEO of Dalton Capital.
The data prove it. Historically, markets have generally rebounded the most in three to six months after strong corrections. With the exception of one case during the technological collapse of 2000, the markets produced positive returns over the next 12 months.
“On average, it takes about 156 days between peak and trough – the lowest was 35 days in 2006 and the highest was 410 days in November 2010 – December 2011,” said analysts at Motilal Oswal.
Another point of note in the story, said Marc Faber, editor and author of the Gloom, Boom & Doom report, is that markets generally follow boom and bust cycles triggered either by the performance of economies, or by human-made events / disasters. The US stock market peaked in 1973 and began to decline until June of the same year. A rally then drove stock prices to new heights in the fall of 1973. When OPEC drastically raised prices to cause the “oil shock”, stock prices started to sell again and did not reached a low only in December 1974.
“We are facing the COVID-19 epidemic at a completely different phase in the stock market cycle. US stocks peaked in March 2000, then fell sharply until October 2002. The Nasdaq 100 index fell 82% in those two years. By early 2003, when the Severe Acute Respiratory Syndrome (SARS) pandemic began to spread rapidly, the Nasdaq 100 had recovered somewhat, but was still extremely depressed and oversold. In other words, SARS came after a tough bear market and provided a buying opportunity for stocks from around the world – including Asia, “said Faber.
The main difference between 2003 SARS and COVID-19, however, is the size of the Chinese economy. It represents 28.4% of world industrial production, whereas in 2003 it represented only 8.7%. Given this, the impact on the world economy of an economic collapse in China would be much greater today than when its industrial production represented less than 9% of world production in 2003.
Is it time to buy?
Meanwhile, the sharp drop in Indian markets from their peak levels has made the valuations attractive to long-term investors, analysts said. The market capitalization / GDP ratio – (a ratio used to determine whether a global market is undervalued or overvalued compared to a historical average. A value between 50 and 75% indicates that the market is slightly undervalued) – a slipped 79%. 19% to 58% (EF20E GDP) – well below the long-term average of 75% and closer to the levels last seen in FY09, reports suggest.
“It has remained fairly stable in FY15-19 in the 70-80 percent range and the lowest we have seen in the past two decades is 42 percent for FY04. However, it should be borne in mind that the number of listed and listed companies was then much lower than today. The ratio peaked at 149% in December 2007 during the 2003-08 bull run, “said a report from Motilal Oswal Securities.
Another silver lining with regard to valuation is that in previous cases of a stock market crash such as the GFC, the larger markets (medium and small caps) were in a euphoric zone, analysts said. Currently, larger markets are showing no euphoria as they have experienced significant underperformance since the start of 2018.