The coronavirus pandemic shocked the global economy and led to a general sale of shares as an asset class. Since the first cases of the coronavirus appeared at the end of 2019, world markets have experienced a serious collapse. The Dow Jones Industrial Average (DJIA) and the S&P 500 completed an 11-year bull run – the longest ever – the S&P BSE Sensex and the Nifty 50 also entered the bear market with a drop of more than 30% each. A fall of 20% or more in a share or index is generally considered a bearish move for that traded unit.
According to a recent analysis by Jefferies, a global research and brokerage firm, 18% of Nifty 100 stocks with a long trading history have recently traded below their GFC rating. As a result of the collapse of the market, 84% of stocks were below the five-year average and 78% below the ten-year average. Jeffrey’s report indicates that within the Nifty 100, several state-owned companies such as the State Bank of India (SBI), GAIL, ONGC, NTPC, Bank of Baroda (BoB), Punjab National Bank (PNB) and Power Finance Corporation have fallen below the GFC level. Adani Ports, ITC, Tata Motors, Shriram Transport Finance, DLF and Zee Enterprises among private companies below GFC level.
Meanwhile, analysts have revised their global growth expectations downwards. Morgan Stanley and Goldman Sachs expect the global economy to fall into recession if the coronavirus is not brought under control quickly. It is alarming that BofA Securities believes that the US economy is already in recession. As a result, most asset classes are likely to remain under pressure – at least for the time being, according to analysts.
So, how long can this pain last, and can the coronavirus pandemic be the end of healthy profits for the equity asset class?
Most analysts disagree.
This is not the end of the capital investment. We have experienced such situations many times in recent decades. For COVID-19, it is now necessary to detect new cases in the United States, Europe and India. From now on, the development of these regions will determine the development of the markets. When markets fall so fast, there is usually some support when they fall 25-30% of their peak – and that’s where we are now, in terms of the current market. The most important step in the correction in history was the decrease of about 60 percent from the 2008 peak during the FGC. The corresponding figure is now about 6,000 on Nifty, which should serve as a basis of absolute support, said Woo R Bhat, Dalton’s Capital Director.
The data proves he’s right. Historically, markets have tended to recover more strongly in just three to six months, after major adjustments. With the exception of one case during the technological collapse of 2000, the markets showed a positive return over the next 12 months.
On average, about 156 days pass between the maximum and the minimum – the minimum was 35 days in 2006 and the maximum was 410 days in November 2010 – December 2011, according to analysts Motilal Oswald.
According to Marc Faber, editor-in-chief and author of the Gloom Boom & Doom report, another point in history is that markets tend to follow the cycles of boom caused by the functioning of the economy or by man-made events or disasters. The American stock market peaked in 1973 and began to decline until June of that year. Subsequently, the recovery led to almost new peaks in share prices being reached in the autumn of 1973. When OPEC raised prices significantly to cause an oil shock, stocks did not begin to sell again until December 1974.
We are dealing with a KOVID-19 epidemic in a completely different phase of the stock market cycle. US reserves peaked in March 2000 and then fell sharply until October 2002. The Nasdaq 100 index fell by 82% in these two years. By early 2003, when the Severe Acute Respiratory Syndrome (SARS) pandemic began to spread rapidly, the Nasdaq 100 had recovered somewhat, but remained extremely depressed and was still being sold. In other words: SARS arose after an exhausting bear market and offered the opportunity to buy shares worldwide – including in Asia, according to Faber.
However, the main difference between SARS 2003 and KOVID-19 is the size of today’s Chinese economy. It accounts for 28.4% of global industrial production, up from only 8.7% in 2003. In this context, the impact of China’s economic collapse on the world economy would be much greater than in 2003, when China’s industrial production accounted for less than 9% of world production.
Is it time to buy?
Meanwhile, the sharp decline in Indian markets of their peaks has made the estimates attractive to long-term investors, according to analysts. Market capitalisation in relation to GDP – (ratio used to determine whether the market as a whole is undervalued or overvalued in relation to the historical average). A value between 50 and 75% indicates that the market is slightly undervalued) – up from 79% in FY19 to 58% (GDP in £20) – far below the long-term average of 75% and closer to the levels last seen in FY9, as indicated.
For fiscal year 15-19 it was fairly stable in the order of 70-80%, and the lowest level we have seen in the last two decades is 42% for fiscal year 2004. However, account must be taken of the fact that the number of listed and traded companies was much lower than at present. This ratio peaked at 149% in December 2007 during the 2003-2008 bull run, according to a report by Motilal Oswal Securities.
Another valuation advantage is that in previous cases of market collapse, such as PFCs, the wider markets (SMEs) were, according to analysts, in the euphoric zone. The major markets are not euphoric at the moment, as they have experienced a significant decline since the beginning of 2018.
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