Caveat Investor: If Covid-19 Is As Bad As 2008, Sensex Could Correct All The Way To 16,000

On 6 March, Yes Bank hit a lifetime low of Rs 5.55 per share, when it appeared as if it was going down in flames. One 18 March, once it was clear that the State Bank of India and other private sector bankers would bail it out, the share price rose more than 10-fold from the low.

Anyone who was privy to the rescue strategy of Yes bank, assuming he had invested at the bottom or thereabouts, could have made a killing.

This, unfortunately, is the nature of the stock market in general today, where blue chip prices are dropping by phenomenal sums one day, and then recouping a large chunk of the losses on another day, only to fall some days later. This is not a market for heart patients.

A few simple conclusions.

#1: This is a speculators’ market, not an investors’ market in the short to medium term. Investors who expect to make money by picking falling stocks need to know that their returns horizon could be a minimum of three to five years. Senior citizens, in particular, should not be heavily into stocks.

#2: Since we know nothing about how the Covid-19 pandemic will finally pan out and how long the world economy will take to recover from its effects, this market crash is more difficult to reverse than the one we saw in 2008, where the crisis was initially financial in character. Last time, the real economy was impacted by the crash in financial stocks. This time, the financial markets have been impacted by a crash in the real economy. The world economy may be less responsive to purely monetary and fiscal stimuli.

#3: The market will be very volatile as it responds to news both on Covid-19 and financial and fiscal palliatives. It will yo-yo unpredictably. Any rumour will impact prices hugely.

It is worth recalling that in 2008, the Sensex hit a peak of over 20,500 in the first half of January, and bottomed out at just over 8,300 in March 2009 — 14 months later. The markets corrected by nearly 60 per cent from the peak. That peak took one more year to achieve in 2010 November.

One wonders if the Sensex will follow a similar trajectory this time, given that the world economy’s problems have compounded since 2008 and few central banks and governments have the firepower to reverse the situation quickly.

A 60 per cent fall from the Sensex peak of just under 42,000 last January would imply that the index could fall all the way to 16,000-17,000 before it starts sustainable recovery.

In this kind of market, one cannot predict the possibility of real returns in the foreseeable future. It may be all right to continue investing in SIPs (systematic investment plans) in order to buy shares at lower and lower prices, but positive returns on your mutual funds should not be expected except in three- to five-year horizons.

In the immediate future, it may not be a bad idea to shut down the markets for a week, so that investors don’t get caught up in a herd frenzy that destroys even more value.

To repeat, this is not an investors’ market in the short to medium term. It suits speculators best, even if some of them lose their shirts occasionally.