The news has not been good for a while.
India’s Gross Domestic Product spiralled downwards for six consecutive quarters, touching 4.5% (September 2019), the latest being 4.7% (December 2019).
End November 2019, Finance Minister Nirmala Sitharaman stated that “economic growth may have come down but there is no recession; there will be no recession”. BJP's Aswini Vaishnaw termed the slowdown as “cyclical, not a structural thing” and predicted that it will “bottom out by March, followed by strong growth".
But many were not convinced.
In December, India’s former chief economic adviser Arvind Subramanian in a co-authored paper stated that “this is not an ordinary slowdown. It is India’s Great Slowdown, where the economy seems headed for the intensive care unit.”
In January this year, Nobel Laureate Abhijit Banerjee stated that the Indian economy was on the verge of a major recession. He pointed to lack of demand, and believed that the government should focus on stimulating demand increasing consumer confidence.
Now we have Ruchir Sharma, author and head of Emerging Markets and Chief Global Strategist at Morgan Stanley Investment, warning of a looming global economic crisis. According to him, a global recession is a certainty, it is just the depth and longetivity that is questionable.
Below are some takeaways from the interview.
- Early estimates suggest that the global economy will contract by 1%. But this is based on the assumption that activity resumes a normal path by May 2020. If it does not happen, then we are looking at the worst global recession since the Great Depression that started in 1929.
- It is not common for the entire global economy to contract. The last time the global economy contracted by a similar magnitude, was in 2008 and 2009, heralding the Global Financial Crisis, or GFC.
- When you see how quickly the U.S. stock market has fallen over such a short span in time, such a parallel is only evident during the start of the Great Depression. In a typical U.S. bear market, the index falls by 30% over 15 months. This time, we witnessed a 32% decline in 18 days. This never happened during the GFC.
- When it comes to India, we do not have much fiscal headroom for a stimulus. In 2008-09, the revenue numbers and deficit numbers were different. Today, we are entering a global economic slowdown with the economy already in a severe slowdown. If India has to do a fiscal stimulus, it will hit the deficit. Which means, the deficit will have to be monetised. Which means, the rupee takes a bit hit.
- Even in normal circumstances India is not growing at 6-7%. Post pandemic, if we grow at 3% that will be a miracle. We have an anchoring bias. We grew by 7% in the past, so we can get there. But economies all around the world are going to contract, even China. The entire global economy has changed. De-globalization. Incredible debt. Change in demographics.
As Sharma speaks of 3-4% growth, Bank of America Securities projects the June 2020 quarter growth forecast to be 3.1% and the India GDP target to be 4.1% for FY21.
Chief Bloomberg Economist Tom Orlik believes that the U.S. will shrink 0.5% in 2020 and the euro area 2%; China’s economy will expand by a mere 1.4%. He admits that these are “abysmal numbers, and the pace of deterioration in expectations is breathtaking”.
Mark Mobius echoes a similar sentiment for most parts of the globe, including India. “If you define recession as two quarters of declines in GDP growth, there is no question that we are going to have a recession.”
Shankar Sharma spoke about a deep bear market arriving, and why earlier parallels may not help. Here are a few takeaways from his conversation.
The GFC happened because of financial leverage. Financial leverage can be resolved through additional capital with the central bank provided.
SARS (Severe Acute Respiratory Syndrome) affected 26 countries and resulted in more than 8,000 cases in 2003. SARS came at a time when global markets had already undergone a brutal bear market for three years after dotcom meltdown that started in 2000. So the world had already undergone a very substantial bear market. The Sensex had already crashed by the time SARS virus hit the world. So, there was not much room left to fall.
The Coronavirus pandemic is happening at a time when everything was at a high despite the global earnings picture and Indian earnings picture not being that robust on a widespread basis. It was being contributed by a very narrow set of companies. We know in India that just a handful of companies were driving earnings growth as well as the stock market growth.
When a narrow market collapses, the reasons can be many, but it will collapse for a genuine reason and that’s that earnings outlook has just vanished. At least for large parts of the market. So, these are the fundamentals and they are really looking terrible. A bull market may happen because of many reasons: fraud, central bank manipulation, irrational euphoria, sometimes fundamentals. But bear market is always based on only one reason: Fundamentals.
So what must you do?
Buckle up for a rough ride.
The Asian Financial Crisis took around 24 months to wind down, the SARS and Dotcom bust around 36 months. The GFC impacted the markets for at least 17 months. This time, the scale of economic disruption globally is immense and unprecedented. But eventually, all end. The duration of each will vary, but they end.
Economies go through expansions and recessions. Life is cyclical, so are markets and economies. Just don’t panic.
Don’t act in haste. Whatever decision you make, try and be extremely logical and non-emotional.
Talk to your financial adviser regularly.
