Year 2020 - Big learning experience for Equity Investors
2020 has been a very challenging year for all of us. The spread of the coronavirus and the subsequent lockdown has changed the way we think, behave and even consume. Some industries and businesses have suffered like aviation and tourism while others like IT and Pharmaceuticals have done well.
The markets went through three different phases – all in the span of a few months or we can say in the year 2020.
Phase 1 - The Rise (January 2020)
Phase 2 – The Bears Rule (Mid February – May 2020)
Phase 3 – Quick Return of the Bull (May 2020 – ? )
Phase 1: The Rise
Many investors started their journey with equity investments through direct equities in last 4 to 5 years. The number of stock trading accounts opened during the same period were clear signs of this interest. Even in the mutual fund industry, this was evident, as the number of new investors and folios almost doubled in the last 5 years. These investors who started their equity investment journey between 2015 to 2019 had mostly seen the market rising from 27,500 to 42,000 in a span of five years. And the returns looked good!
At the peak of January 17, 2020, S&P BSE Sensex was trading at PE of around 26X times and remained rangebound up to February-end. Most investors remained invested when the news of COVID-19 spreading across the world continued to flow in. There were few investors who took a tactical call at that time and exited partially from equities as the market peaked at this stage.
Phase 2: The Bears Rule
As COVID-19 cases surged across the world, it triggered massive panic selling not only in India – but across the globe. This was the first time where equity portfolios started turning red and the test of nerves began, did investors have the faith in the stock markets or not? Then the stock market receded quickly and within 18 trading sessions from February 25 to March 23, S&P BSE Sensex lost 14,300 points i.e. 35.5 percent. This was where the lesson of the real risk of stock market investing was learnt, where investment of years turned negative and many investors witnessed such massive correction for the first time. Last time such uncertainty was seen during Lehman crisis way back in 2008.
During this sharp correction, investors took either of two extreme routes. Those who could not see constant erosion of their money, decided to exit and others held their nerve continued with their investment. Investors must understand that selling in a falling market is not the right move for a long term investor as it is the nature of equities to be volatile and its volatility increases during uncertain times. Infact, such events also create a good opportunity to add more stocks of the right companies and mutual funds to the portfolio. Experienced investors took advantage of market correction between March to April 2020 and went on a shopping spree. The valuations of stocks, which were very expensive during surging markets, were available at attractive prices. S&P BSE Sensex PE was in the range of 15X to 20X during these months compared to 26X in January 2020. These investments would have generated massive return so far depending on the day of investment.
Phase 3: Quick Return of the Bull
The recovery was faster-than-expected given the magnitude of the crash and slow down in economic activities. Across the world it looked like a 'V' shaped recovery and a segment of investors felt left out as they anticipated markets to dip further. The learning here is to keep investing during the falling markets rather than waiting for the bottom. Every reasonable dip in market is like an opportunity to invest and waiting for the bottom of the market to invest is nearly impossible. The FOMO effect gripped these investors and they became late entrants during the recovery phase.
Is this run sustainable or still uncertain?
In terms of the S&P BSE Sensex we are now around 47,000 mark and PE of around 33X which is considered quite high. Like every typical bull market, high valuations are justified by various reasons. At present, low interest rates across the world, global monetary policy effort to ensure liquidity and regular inflows into mutual funds are all reasons adding the run up in stock markets. Similar situation may continue for some more time as the recovery appears to be faster than expected at the beginning of crisis.
However, disturbing reports emerging out of the UK and South Africa of a new and more virulent strain of COVID and pockets of bubble valuations emerging in certain sectors of stock market are some reasons for investors to be alert.
From reaching with the earlier peak at the beginning of 2020 to ending the year with a new all-time high after suffering a massive correction, the year 2020 has taught us how to handle ourselves and our investments in different situations. While, it is still some time to go before things get clear on the stock market directionally, the experience and learnings of 2020 will come handy in 2021 and for years ahead.
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