After five months an ongoing fall has eroded nearly two-thirds of the previous 12 months gains. The 2020 fall was over in 40 days and the one in 2021-22 ended after giving back half of the previous gain. It may seem that the Nifty50 is nearing a bottom. I have attempted a high-level analysis of 15 years indices data so as to support the above conclusion.
The optimists may be encouraged by the latest economic data that looks better than at the end of 2024. The wars in west Asia and in Europe are nearing their end. That leaves only the uncertainty over the impact of the tariff war on global trade and economic activity.
However, a closer look at four previous falls reveals a few reasons why the ongoing fall could last longer. A global tariff war may yet begin with uncertain impact on economic growth and corporate earnings. There are surprisingly few links between India’s economic data and the inflexion points of the Nifty50. Many of the previous falls ended despite adverse GDP growth, inflation and interest rates. Another surprising insight from the ongoing fall is that the Midcap150 index is preserving more of its previous gains compared with the Nifty50!
The 2020 fall may not be a proper reference. In February 2020 the Nifty50 had risen by only
12.6 percent in the preceding 12 months. The shock triggered by the pandemic and the lockdowns pulled it down by over 4500 points in 40 days. This was more than thrice the rise in the preceding year. There was a perception of deep value that began a steady recovery. The next fall that began in October 2021 lasted for almost eight months.
The fall that began in March 2015 was a ‘three-steps-down-two-steps-up’ move. The Nifty50 had risen by 37 percent in the previous 12 months. The fall lasted 11 months and eroded 80 percent of the previous gains.
Falls often end despite an adverse change in one, or more, economic indicator.
In June 2022 the eight-month long fall in the Nifty50 ended after industrial growth too had fallen to half of that in October 2021. Consumer inflation had risen to 7.5 percent and the GSec yield had risen by more than 1 percent. In each of the four previous falls the Nifty50 bottomed out with at least one of these three ‘high-frequency’ economic indicators had moved adversely.
Conventional logic may support a view that investors’ expectations of corporate earnings growth follow the changes in the real economy. And yet there are times when the inclination to sell builds up when economic indicators appear healthy, and vice versa.
Do midcap stocks have a statistical edge over large caps?
The Nifty Midcap150 index has lost 4,070 points in the past five months. This is 57 percent of the 7,203 points added during the 12 months prior to the September 2024 peak. In contrast the large cap Nifty50 index has lost 4,054 in the same interval, corresponding to 63 percent of the points added in the preceding 12 months.
In each of the previous three falls the midcap index gave back a smaller part of the gains in the rally that preceded the fall!
The Nifty50 had risen 57 percent in the 12 months preceding the fall that began in January 2008. It was more than a year before the rebound began. And after that, another year and half before the Nifty50 reached its
2008 peak.
During the fall industrial growth stayed high averaging 10.4 percent, Consumer inflation rose to near 10 percent and GSec yields too rose to near 9 percent.
The 11-month long downturn pulled down the Nifty50 by 22 percent retracing most of the 37 percent rally in the preceding year. A year after the rebound began the Nifty50 reached its 2015 peak.
The fall ended with industrial growth down to 2.5 percent and GSec yield edging up to 7.8 percent.
The Covid-19 downturn lasted less than two months. The 37 percent fall was reversed in seven months. The 12 months preceding the fall had seen a gentle 13 percent rise in the Nifty50. These seven months saw industrial production growth near 1 percent and low consumer inflation and low interest rates.
The next downturn lasted eight months amid rising inflation, rising interest rates and, a fall in industrial growth. The Nifty50 bottomed out in June 2022 despite the adverse change in all of these ‘high frequency’ economic indicators.
The fall began at end of September 2024 after a 33 percent rally during the preceding 12 months. The five months long downturn has, so far, lasted about half the durations of the falls in 2008 and in 2015-16. The 15 percent correction in the Nifty50 is smaller than that
during the 11 months long downturn in
2015-16.
Conclusions:
It will not be sufficient to base the recovery expectations to the previous two corrections.
The current fall began after a 33 percent rise in the 12 months preceding September 2024. It is more comparable to the 2015-16 fall.
It will be important to dive deeper into a) Valuations, b) significant changes to the composition of the indices and c) part the FIIs fund flows have played in the corrections and recoveries in the previous falls.
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