The coronavirus pandemic has rattled global economies and triggered an across-the-board sell-off in equities as an asset class. Since the first coronavirus cases emerged in late 2019, global markets have sharply fallen. The Dow Jones Industrial Average (DJIA) and the S&P 500 ended their 11-year bull-run—the longest ever in history—as the S&P BSE Sensex and the Nifty 50, too, entered bear-market territory with a fall of over 30 per cent each. A fall of 20 per cent or more in a stock, or an index, is typically regarded as a bear phase for that traded unit.
A recent analysis by Jefferies, a global research and brokerage house, said 18 per cent of the stocks that comprise the Nifty 100 and have long trading histories recently traded below their global financial crisis (GFC) valuation. The market meltdown also saw 84 per cent stocks go below their five-year and 78 per cent below their 10-year average valuations. The Jefferies report said that within 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 below GFC lows. Adani Ports, ITC, Tata Motors, Shriram Transport Finance, DLF and Zee Enterprises among private companies tanked below the GFC lows.
Meanwhile, analysts have revised downward their forecast for global growth. Morgan Stanley and Goldman Sachs expect the world economy to enter a recession if the coronavirus is not contained soon. Worryingly, BofA Securities believes the US economy is already in recession. Most asset classes are likely to remain under pressure therefore--at least for now, said analysts.
So, how long is the pain likely to last and could the coronavirus pandemic be the end of generating a healthy return from equities as an asset class?
Most analysts disagree.
“This is not the end of investing in equities. We have seen such situations many times in the last couple of decades. As regards the COVID-19, one now needs to monitor fresh cases in the US, Europe and India. Developments in these geographies will decide the markets trajectory from here. Typically, when the markets fall so fast, there is some support once they slip around 25 to 30 per cent from the peak—and that’s where we are right now in terms of current market. The biggest correction phase in history was around 60 per cent fall from the top in 2008 during the GFC. The corresponding level now works out to be around 6,000 on the Nifty, which should act as an absolute support base,” says U R Bhat, managing director at Dalton Capital.
Data proves this correct. Historically, markets usually rebound the most in three – six 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 an average, it takes about 156 days between the peak to trough – the lowest has been 35 days in 2006 and the highest 410 days in November 2010 – December 2011,” said analysts at Motilal Oswal.
Another point to note from history, said Marc Faber, editor and author of the Gloom, Boom & Doom report, is that markets typically follow boom and bust cycles triggered either by how economies perform or manmade events/catastrophes. The US stock market topped out in 1973 and began to decline until June of that year. A rally then led to stock prices reaching almost new highs in the fall of 1973. When OPEC increased prices substantially to cause the ‘oil shock’, stock prices began to sell-off again and bottomed out only in December 1974.
“We are dealing with the outbreak of COVID-19 at a completely different phase of the stock market cycle. US stocks topped out in March 2000 and then declined sharply until October 2002. The Nasdaq 100 Index declined over these two years by 82 per cent. By early 2003, when the Severe Acute Respiratory Syndrome (SARS) pandemic began to spread rapidly, the Nasdaq 100 had recovered somewhat but it was still extremely depressed and oversold. In other words, SARS occurred after a grueling bear market and provided a buying opportunity for stocks around the world — including Asia,” Faber said.
The key difference between the 2003 SARS and COVID-19, however, is the size of the Chinese economy now. It accounts for 28.4 per cent of global industrial production, whereas in 2003 it accounted for only 8.7 per cent. Given this, the impact on the global economy of an economic collapse in China would be far greater today than when its industrial production was less than 9 per cent of world output in 2003.
Time to buy?
Meanwhile, the sharp fall in the Indian markets from their peak levels has made valuations attractive for long-term investors, analysts say. Market cap-to-GDP ratio – (a ratio used to determine whether an overall market is undervalued or overvalued compared to a historical average. A value between 50 and 75 per cent indicates the market to be modestly undervalued) – has slipped from 79 per cent in FY19 to 58 per cent (FY20E GDP) – much below long-term average of 75 per cent and closer to levels last seen during FY09, reports suggest.
“It has been quite stable over FY15-19 in the 70-80 per cent band and the lowest we saw in the last two decades is 42 per cent in FY04. However, one must keep in mind that the number of listed and traded companies then were much lower than today. The ratio hit a peak of 149 per cent in December 2007 during the 2003-08 bull-run,” says a report from Motilal Oswal Securities.
Another silver lining as regards valuation is that in previous cases of market crash such as the GFC, broader markets (mid-and small-caps) were in euphoric zone, analysts said. Currently, broader markets do not indicate any euphoria, as they have witnessed significant under-performance since the 2018 beginning.