Since the last few days the market is under selling pressure due to Coronavirus, as of today (Mid Jan 2020 to 12-Mar-2020) most of the indices fell by more than 20%.
Do we need to really panic about this sell-off or treat it as an opportunity?
We have done a good bit of research about similar cycles in the past, here are our observations:
The below table we have the sample for the period Jan 2002 to 9th Mar 2020, of Nifty 50 fall of > -10% (monthly wise continuous negative periods)
Observations:
• There were 5 major global virus outbreaks in the past 18 years. SARS (2003), Avian Influenza (2004), Ebola (2013-14), Zika (2015-16) and Covid-19 (2020). Only SARS, Influenza and Covid-19 had a major impact on markets that delivered high returns after recovery from SARS & Influenza virus outbreaks.
• In the past 18 years, there were only 12 times when Nifty fell by >-10% continuously, 6 of which are in 2 calendar years (2008, 2011).
• No event lasted for more than 3 months continuously, it ranged from 1 month to 3 months
• Out of 12 periods, 11 periods generated positive returns in the next 12 months following the downslide. (6 periods > 25%, 3 periods > 14%, 1 Period with 4% and 1 negative period, negative period delivered 4% returns in 18 months instead of 12 months)
Takeaways:
· While the past doesn’t necessarily predict the future, it shows that simply put, corrections tend to be short and recoveries are fast.
All the above tells us about the short-term opportunity, do you know how it impacts your long-term wealth creation?
See the below graph to see the difference,
Observations:
· Apart from the above-highlighted events there were a lot of other small events that happened in the past 18 years, but if you observe the graph it has reached a new high after almost every fall.
· Investments made before the crash (at the peak) delivered 4% CAGR return, while investments made after the crash (at the bottom) delivered 13% CAGR, a difference of 9%
· For a long-term investor, a correction is an opportunity to invest as it increases the chances of making more money and losing less money.
Lastly, below is the performance of the indices along with GCIA recommended portfolio since last one year (As on Mar 9th)
Our recommended portfolio has done better than all the indices in the last one year.
Having said that, at this juncture, our focus should not be on the outperformance but on the opportunity.
Is this the bottom?
Don’t know, frankly, no one knows, but we think the bottom is near as compared to the peak, isn’t it appealing to invest now?
