We are going through an exceptional period of bad news globally. However, there is nothing unusual about bad news.
30-Mar-2023 •Dhirendra Kumar
Pandemic, war, bank failures, and probably a few more by the time you read this column. It does feel like a time of exceptional turmoil. Well, it may feel unprecedented, but it's not. Spend some time going over the history of the last 30-40 years or so, and you'll realise that things are pretty much normal. In fact, if we were to have quiet three-four years, with no turmoil or negative events, then I would start worrying about the reversion to the mean that would inevitably occur. It's like earthquakes, actually. A few minor ones once in a while may actually relieve the stress and reduce the chances of a big one.
So let's look at the last half-century. In 1973, things were quite bad. India was in a bad state economically, having just gotten through a war which was a military triumph but obviously very expensive. Then the first oil shock hit, and crude prices went up from around USD 2 to 3 dollars to about USD 12 in months. Years of high inflation and political strife followed around the world. In the US, interest rates were jacked up in the late 70s to combat inflation.
One of the effects was that over the next few years, about one-third of 3000-odd 'Savings & Loans Associations' failed in the US. S&Ls are like co-op banks in India - members own them, take deposits and give loans. Does this chain of events ring a bell? High inflation in the US > Fed raises rates massively > weak banks to start failing. Yes, you're right. What you see nowadays is an action replay of events that have happened earlier and no doubt will happen again.
There was a crisis almost every year. Here's a list of the big ones. The early 1980s recession in the west. The 1991 economic crisis in India. Harshad Mehta and related scams. The so-called 'Asian' crisis of 1997 and the 1998 Russian economic collapse. The dotcom crash of 2001, coupled with the 9/11 aftermath. The oil price bubble of 2003-2008. The global financial crisis of 2007-2009. The European sovereign debt crisis started in 2012 or so and came to a head in 2019, especially in Greece and other weaker economies. Then came the COVID lockdowns and the various economic disasters that they caused. In our neighbourhood, look at Sri Lanka, Pakistan and even Bangladesh. Although each of these - especially Pakistan - was exacerbated by other national pathologies, there is little doubt that the COVID lockdowns contributed.
So something or the other is always going on. Note that the actual list is much longer; these are just the big ones. If someone who does not know how equity investments fared over this period looks at this list, they would conclude that no one could have made any money. Every equity investor must have gone bankrupt sooner or later after they started. And yet here we are. Equity has proven to be the best investment class throughout this period.
If, as an investor, you are scared by the events of the day, what should be your course of action? I would say look at history and realise that your fears are unfounded. Keep reading the news but don't let it affect your investment outlook. You and I have no way of looking into the future and figuring out what happens to global banking, the European conflict, or anything else. However, the important thing to remember is that we don't need to know any of this unless we are punters buying and selling stocks within a few days' horizons.
With all these events playing out, there's little doubt that volatility and perhaps substantial declines will be seen across stocks. However, the Indian economy and our markets are much more resilient now to such shocks than earlier. Large domestic inflows, especially from equity SIPs and the EPFO, provide a cushion that was missing earlier. Some hiccups will always be coming, but investors would do well to stay focused on the quality of their investments and not shy away from taking advantage of low stock prices whenever they are available. If you do that and focus on quality, it's a good time to invest, as it always is.
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