Buckle up for a bear market

By Morningstar |  13-03-20 | 

So the bear market will be blamed on the coronavirus and its reverberations on the global economy. Though, it is worth noting that stock prices ran up much faster than company earnings.

In an interview with Economic Times a month ago, Shankar Sharma once again emphasized that the economy and market are not linked, and the market is a different kind of animal where logic doesn’t always hold. Hence with a slowing economy, the Sensex was scaling new highs.

He also stated that he does not see a broad bull market for a long, long time, and spoke of sub 5% GDP growth. Money will have to be made picking select stocks.

Now there is no sign of a broad bull market. The bears are all out in full force. A few days ago, Shankar Sharma again shared some interesting insights with Bloomberg, which can be heard here. Below is an excerpt.

This time, it is different.

The Global Financial Crisis of 2008 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; I think 50%, 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.

A bear market can be long and painful. 

A bear market typically can go on for a pretty long time. Take a look at markets across the world in 2019: 37% rise in Nasdaq, 50% in Russia and 30% across Europe. With that kind of market in any case, the following year is almost never a good year. Look at the history of markets, and in very few years you will see back-to-back gains of 30+%. It happened in 2006 and 2007, and you know how 2008 happened.

When 2019 ended, I told my team that we will be lucky if we end flat for the year 2020 because everything is frothy, all asset classes did well, and you just need a spark to ignite a big sell off. That spark is coming from the coronavirus, at a time when the markets had a very strong 2019. The magnitude of the fall is such that you can go down a long way before things stabilize, because you’ve run up a long way in the last few years.

We are not talking about a correction of a pretty strong bull market. We are witnessing a significant fundamental-driven bear market, which is exactly what 2008 (Global Financial Crisis) was, which was even what 1997-98 (Asian Financial Crisis) was.

That Asian crisis took 2 years to wind down, the SARS and Dotcom crisis took 3 years to wind down, the 2008 crisis was at least 17 months. Here we are the first or second month into a major collapse. This scale of economic disruption, on a worldwide basis, is immense.

Remember, don't make hasty decisions. Each bear market is different. Eventually, all end. But the duration of each will vary.

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Daniel DSouza
Mar 17 2020 07:38 PM
 Was everything really up? I thought the consensus was that just a few stocks were propping up the major indices while the broader market was in decline. In fact, mid cap indices were falling steadily and most mutual funds had minimal returns to show for the last 3-5 years. Last year India had an economic slowdown and things were just beginning to improve when this crisis started unfolding.
I believe this current correction has already brought most stocks to reasonable to cheap levels and while they may take quite a while to recover, there is definite opportunity available.
Mukund Pawar
Mar 16 2020 09:17 PM
 Great article!
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