It can be said that slowdowns do not last for long periods, therefore if one has a long term view economic slowdowns are perfect opportunities to generate exceptional returns.
After careful analysis and evaluation of portfolio returns in the aftermath of a slowdown, it can be seen that investors do benefit post slowdown in the form of windfall gains if they stay invested through the worst phase of a slowdown.
Analysing the dynamics of the current slowdown, it can be said that slowdown in a developed economy can snowball into a recession. Whereas for an economy the size of India, with a population of 1.3 billion, there is enough inherent consumption-led growth that provides a solid GDP base.
Although, there is severe stress in various sectors of the economy, led by the auto and the realty sectors, the problems are structural and not cyclical. Structural problems can be addressed through reforms and intervention, cyclical problems are harder to tackle.
The government is already on its way to make reforms and working aggressively to restore confidence in the banking, NBFC, realty and auto sectors among others.
From the following table it can be seen that in just one and half years post 2008 economic crisis benchmark Indian equity index, Sensex rebounded a whopping 127 percent and since then has returned an astounding 400 percent in a decade. In the two years immediately following the 2011 slowdown Indian benchmarks bounced back and returned approximately 40 percent during the period.
How a slowdown is good for investment portfolios
Recent history suggests that slowdowns in the economy are short-lived given the structure of the Indian economy, equity returns post an economic slowdown are exceptionally high. Investors therefore can benefit from the crisis in several ways.
The current slowdown is a boon for investors who want to put fresh money to work; several companies with exceptional fundamentals are trading at very attractive valuations such as several bellwether stocks which are representative of the health of the Indian economy have shed an average of 20 percent or more.
Another aspect of a slowdown is that it triggers a risk-off reaction in the investor psyche therefore stocks that are inherently considered risky for e.g. companies in the midcap, smallcap spaces are punished exceptionally hard and corrected to the tune of 40-60 percent.
Investors with some risk appetite can therefore build a smallcap centric portfolio with potential windfall gains in a three to five year time horizon.
Existing investors who are sitting on huge losses can take this slowdown as an opportunity to restructure and rebuild their portfolios. Investors with some liquidity at their disposal can average down their existing buying in good names and reduce their time and chances of portfolio loss.
For those do not have any fresh money to put in, it is a good time for portfolio evaluation and re-allocation into stocks which have been resilient, booking losses in speculative stocks or stocks whose fundamentals have materially changed is also advisable for such investors.
Market correction relating to an economic slowdown provides investors with an opportunity to introspect, portfolios that were never adjusted to achieve optimal diversification or have passed individual risk tolerance now become perfect candidates for major portfolio rejig.
Slowdowns also provide investors with an opportunity to identify their real risk tolerance. And if the current market conditions are leading to significant mental stress it is advisable that such investors should restructure their equity holdings into debt and other alternative assets. For example, real estate prices in several metros have come down significantly and present an investment opportunity in such asset classes.
It is impossible to time the depth and duration of slowdown, therefore it is always advisable to be patient, avoid any hasty investment decisions in panic and take advantage of market opportunities through a stepped approach.
In the Indian context, it can be said that slowdowns do not last for long periods, therefore if one has a long term view economic slowdowns are perfect opportunities to generate exceptional returns.
The author is Director at Wealth Discovery/EZ WealthDisclaimer: The views and investment tips expressed by investment expert on moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.You can now invest in mutual funds with moneycontrol. Download moneycontrol transact app. A dedicated app to explore, research and buy mutual funds.