There is a heated public debate about the economic slowdown in India. Most sensible people are not arguing whether we are facing a slowdown because the signs are clear; the debate about how serious the situation is. Is this just a slowdown or a recession? The generally accepted definition of recession is two consecutive quarters of negative real GDP growth is generally accepted to constitute a recession. If we go with this definition, then India has not had a recession in the last 20 years. Semantics aside, there is no doubt that we are facing significant slowdown in economic growth.
Moderate to severe slowdown
The GDP growth rate of India has been slowing down every quarter from April to June 2018 onwards and was just 5% in the first quarter (April to June) of this fiscal year. While the woes of the automobile sector is well known to many, Index of Industrial Production (IIP) numbers for the past few months shows significant slowdown in overall manufacturing output. July’19 IIP growth was 4.3% compared to 6.5% a year back. The NBFC sector has been going through a financial crisis with several companies defaulting on their obligations.
The stock market has been going through challenging times for more than a year now. Foreign institutional investors (FIIs) pulled out more than Rs 70,000 crores from the stock market in 2018. In the last 4 months (May to August’19) FIIs pulled out Rs 34,000 crores. Nifty has given virtually no return (flat) in the last 20 months or so. The broader market, on the other hand has seen sharp cuts, with midcaps and small caps declining on average by 25% to 40% over the last 20 months.
According to Goldman Sachs, this is the longest economic slowdown since 2006. In its effort to revive economic growth, the RBI has been cutting interest rates in every monetary policy meeting (fourth time in a row till August), dropping the repo rate by 110 basis points so far. The Finance Minister announced a host of fiscal stimulus measures in August and more are expected in the near future. Political posturing notwithstanding, RBI and Government measures show that the Government is very concerned about economic slowdown. Whether you have been personally impacted by the slowdown or not, the fact is that the slowdown is very real and can impact you in several ways.
You may like to read – 5 rules to manage your mutual fund investments in volatile markets
How can slowdown affect you?
While older investors may have the experience of going through economic slowdown, younger investors who entered the workforce in the last 7 to 10 years will be / have been going through a slowdown for the first time. For those who do not have experience of economic slowdown, here are some of the main concerns in severe and protracted economic slowdown:-
- The main worry in a severe slowdown is about job cuts and loss of employment. Faced with lower revenues companies resort to restructuring to reduce expenses. In times of economic slowdown search for suitable alternative employment opportunities takes longer and this can cause a lot of financial distress. The distress is even more severe if an individual who has been made redundant has loans (e.g. home loan, automobile loan etc)
- Even if employers do not resort to job cuts, lower or no increments and annual bonus are common in an environment of protracted economic slowdown. This has an impact on lifestyle and savings
- The stock market sees sharp price corrections and high volatility. You may see significant erosions in the value of your stock and mutual fund investments
- There is uncertainty about how long volatility will last and how much prices will fall further. This can lead you to make decisions in panic
- You are likely to hear many rumours about impending bad news in an economic slowdown which may cause nervousness and mental stress. However in my experience most of the rumours in such periods do not turn out to be true. You should always be calm in such situations and never act on rumours
What should you do with your finances in economic slowdown?
- In times of economic slowdown your savings can provide comfort and relieve financial stress. You should have enough savings so that you are prepared for an adverse event like unexpected job loss and are able to meet your regular monthly expenses till you find another suitable opportunity. Economic slowdowns are opportune times when you can take a look at your expenses, see where you can reduce your discretionary spending and increase your monthly savings
- Financial planners usually suggest having a financial contingency fund which can help you meet at least 6 months of expenses. You should have this contingency fund even if your investments in mutual funds so that you do not have to sell your long term assets at the worst possible time (price) in an economic downturn. You should park your savings for financial contingency in a liquid fund to get better returns than savings account
Suggested reading: Best investment options for the young professionals
- Many employees rely on the group health insurance cover provided by their employer for their medical needs. However in the event of a job loss you will lose your health cover. You should provide health insurance protection for your family by buying adequate health insurance
- Do not try to speculate or bottom-fish in the stock market. You may be tempted to invest in stocks which have fallen 50 – 60%, but you should resist the temptation of bottom-fishing unless you have sufficient expertise in understanding the fundamental intrinsic value of the stock and its growth prospects. Some well known stocks have fallen more than 70% in the last 18 to 24 months and they may fall further. If you want to take advantage of the price correction to invest for your long term goals, it is advisable to invest in mutual funds which diversify stock and sector specific risks and are managed by experienced fund managers who have the requisite stock picking expertise
You may like to read why diversified equity mutual funds are good long term investment choice
- If you are investing through systematic investment plans (SIPs), you may not be satisfied with your returns in the last 2 – 3 years. Those of you who started their SIPs 2 – 3 year back may even be staring at negative returns. Things may get worse before it improves, but you should not stop your SIPs. SIPs are meant for long term financial planning and you should stick to your plan.
We suggest that you should read how long did mutual fund SIPs take to recover from the worst market clashes
Good news for you in volatile or bear markets is that, you will buying at lower and lower cost. This will reduce your average cost of purchase and give higher returns in the long term. The value Rs 10,000 monthly SIP in Nifty 50 TRI made between 1st September 2008 to 1st September 2009 (cumulative investment of Rs 1.2 lakhs) would have been almost Rs 4.6 lakhs, 10 years later (almost 4 times absolute returns)
Did you know: How investing in equities for the long term reduces risk
- Equity is a volatile asset class and volatility intensifies during economic downturns. Many investors find volatility to be stressful but you should remember that equity is the best performing asset class in the long term. In the last 10 years, Nifty 100 TRI gave around 15% CAGR returns, significantly higher returns than other asset classes like fixed income and gold. Patience is a critical success factor in equity investing, especially during economic downturns
You may like to read 10 things you should do in volatile markets
- If you are a new investor or someone who does not have the experience of a bear market, you can consider investing in hybrid funds. These funds invest in both, fixed income (debt) and equity. The downside risks of these funds are much less than equity funds. In the last 1 year hybrid fund categories like dynamic asset allocation funds, equity savings funds, conservative hybrid funds etc. gave positive returns on average when almost all equity fund categories gave negative returns on average. You can invest in these funds either in lump sum or SIP depending on your financial needs
Suggested reading - Importance of asset allocation in volatile markets
- Experienced investors can diversify their equity investment by investing in international funds, particularly funds which have exposure to the US stock market. Historical asset class performance shows that US stocks usually outperform emerging market stocks (including India) in times of economic downturns and deep/prolonged corrections. Investors should know that international funds are taxed as debt funds and plan accordingly
- All asset classes are not impacted in the same way in economic downturns; some debt funds can give good returns in a declining interest rate regime as the central bank (RBI) tries to revive economic growth through interest rate cuts. In the last 1 year, debt fund categories like dynamic bond funds, medium to long duration debt funds, long duration debt funds, banking and PSU debt funds etc. gave double digit returns. However, you should understand that these types of funds have moderately high to high interest rate risk. You should invest according to your risk appetite. Credit risk is a major concern during economic downturns as companies go through financial stress. Unlike interest rate risk, damage done by credit risk is permanent and therefore, you must select funds carefully
You may like to read – Why are debt mutual funds better investments than bank FDs
- You should focus on your career and financial goals during economic slowdown and not be worried about what may or may not happen. Do not tinker with investment plan unnecessarily or act in panic. Remember this phase will pass.
In this blog post we discussed about economic slowdown in India. There is no point living in denial because the slowdown started more than a year back. We discussed what you can expect in an economic downturn and you may have already experienced some of the effects. Finally, we shared with you some of our suggestions that can help you navigate through this difficult phase. Economic downturns and bear markets do not last for very long time though this time we are experiencing a slightly longer downturn. Economic history of India shows us that, we are resilient enough to withstand downturns and eventually resume our economic growth journey.
Mutual Fund Investments are subject to market risk, read all scheme related documents carefully.