Economic and Market Cycles are Normal, not a Cause for Concern
George Stigler, the Nobel laureate economist, once famously said that “abnormal is when everything is normal.” Most people regard downturns in the economy as disasters. But the fact is that business cycles – expansion and contraction of economic activity – are normal in market economies.
Indian economy is going through a sharp downswing. It is a fact that the slowdown has turned out to be sharper than everyone expected. Even institutions rich in economic talent – IMF, World Bank, OECD, our own CSO, RBI, and Investment Banks – got their growth forecasts for FY 20 wrong. The projected GDP growth of FY 20 is now at 5 per cent: this would be an 11-year low. Now there is a consensus that growth has troughed out and recovery will begin in the next couple of quarters.
It is important to understand the cyclicality of economic growth and markets. Growth and market movements have never been linear; they are always cyclical. Some cycles will be short while some will be long. For developing economies, the long-term growth trend will always be up, but this long trend will be punctuated with dips – some sharp and others shallow. Take India’s growth trend after the initiation of liberalisation in 1991. During 1992-2019 India has been the second fastest growing large economy in the world with an average growth rate of 7 per cent. However, this long-term trend was punctuated with dips in growth in 1998 (Asian currency crisis), 2000-02 (Tech bubble burst and global recession), 2008-09 (Global financial meltdown and the Great Recession) and 2013-14 (Taper Tantrums and Emerging Market crisis). And now, we are going through this sharp slowdown caused by a combination of issues like the banking crisis, the NBFC crisis and highly leveraged corporates. These crises have impacted crucial sectors like real estate and construction resulting in huge job losses, which in turn, have caused downturn in aggregate demand, pulling economic growth rate down.
This downturn, too, shall pass and the economy will revive. The several stimulus measures – monetary, fiscal and sector-specific – initiated by the government will start yielding results soon. The resilience of the stock market is an indicator of the confidence of investors – both foreign and domestic – in the continuation of reforms and revival of growth and corporate earnings.
It is also important to understand that markets and different asset classes move in cycles. Investors are familiar with the bull and bear phases of markets. If we take the last three decades in India, we had bull markets in 1992, 1994, 2003-08, 2014 and short duration spurts in many other years. Also there has been bear phases, some of them long, like the 1995-2003 severe bear phase. The most important takeaway from these cycles is that downturns are temporary; revival is inevitable and the long-term trend is always up. From the near $300 billion GDP in 1991, now we are close to $3 trillion GDP. And the Sensex has soared all the way from 1000 in 1991 to around 42000 now.
Another important takeaway from investment history is that the best time to invest is not when everything looks good. On the contrary, bad times of poor economic performance have turned out to be good times to invest. In 1991 India faced a major economic crisis; during 2000-03 growth was poor; in 2008 the economy was impacted by the Great Recession and in 2013 ‘Taper Tantrums’ and policy paralysis at home impacted the economy. In retrospect, those dismal times were excellent times to invest.