Rushikesh BhiseShall economic activity change your investment decisions?
Indian financial markets often go through phases of extreme pessimism. During such periods, headlines tend to suggest that the economy has no clear future and that investing has become excessively risky.
The events of 2018 and 2019 further amplified these concerns and created significant stress across the financial system.
2018
The collapse of IL&FS became a major turning point. Despite being AAA-rated, the company defaulted on its obligations due to weak governance and poor business practices. This triggered a sharp loss of confidence across the NBFC space, irrespective of the financial strength or credit profile of individual firms.
As liquidity tightened, lenders became increasingly cautious, impacting financing availability for several small-cap businesses.
Around the same time, multiple instances of governance failures and corporate fraud surfaced because of tightening liquidity conditions. Concerns around governance standards intensified further after the whistleblower allegations involving Sun Pharmaceutical Industries, a widely owned large-cap company.
Despite these developments, sectors such as IT, Pharma, and FMCG ended 2018 near their 52-week highs, supported by relatively strong earnings growth and resilient business performance.
2019
The pressure continued in 2019.
Companies with heavily pledged promoter holdings witnessed sharp selling as lenders liquidated pledged shares to recover liquidity.
Concerns around Yes Bank also intensified as bad loan disclosures increased and asset quality issues emerged. Several large corporates, including Reliance Communications and Cox & Kings, defaulted on obligations, exposing weaknesses in lending structures and increasing stress across the financial ecosystem.
The liquidity squeeze eventually spread across sectors, affecting auto dealers, second-tier NBFCs, and consumption-linked businesses, leading to visible slowdowns in both the auto and consumption sectors.
Yet, despite the overwhelmingly negative environment, several businesses continued reporting healthy growth and many stocks continued making new highs.
Business performance over Economy
The key takeaway is this:
Long-term investing outcomes are ultimately driven more by individual business performance than by broad economic headlines.
During slowdowns or recessions, weaker businesses with poor governance, fragile balance sheets, or unsustainable business models often struggle significantly. At the same time, high-quality businesses with resilient demand, strong execution, or lower economic sensitivity can continue growing steadily.
This was visible in sectors such as Chemicals, FMCG, and Consumer Durables, where many companies continued delivering healthy operational performance despite broader economic concerns.
As a result, even when the economy appears weak at an aggregate level, individual businesses can perform very differently from one another. This divergence in business fundamentals eventually reflects in stock performance as well.
Therefore, periods of economic pessimism do not necessarily eliminate investment opportunities. In many cases, they simply widen the gap between strong businesses and weak ones.
Divergence in stock price and fundamentals
History also shows that stock market performance and economic growth do not move perfectly in sync every year.
While nominal GDP growth and stock prices may broadly align over very long periods, there can be significant short-term divergence between the two. Similarly, stock prices and earnings growth rarely move in exact lockstep.
At times, slowing growth may already be reflected in stock prices well before earnings weaken. In other cases, markets may rally ahead of an improvement in fundamentals.
One important reason for this divergence is that short-term market movements are influenced not just by business fundamentals, but also by investor sentiment, liquidity flows, and market positioning.
As highlighted above, the year 1996-97 lodged a negative change in the nominal growth rate of GDP. Still, the market rallied up to 16%. Similarly, from 2014 to 2016, there was no positive change in nominal GDP growth rate, still the market rallied more than 12% CAGR.
Coming to earnings growth, the relationship between stock prices and corporate earnings is not always immediate or linear.
Between 2000–01 and 2003–04, the earnings growth of the BSE Sensex remained negative. Yet, the stock market continued rallying during this period.
This clearly shows that stock prices and earnings growth often move with a lead or lag effect. Markets tend to anticipate future recovery much before it becomes visible in reported earnings.
Such divergence makes it extremely difficult to consistently predict market movements based purely on economic or earnings data. Even if an investor manages to exit before a slowdown, re-entering at the right time becomes equally challenging because market recoveries often begin before economic growth improves visibly.
As a result, investors risk missing a significant portion of long-term returns while waiting for economic clarity.
Time in the market is more important than timing the market
To understand this better, we studied the historical monthly returns of the BSE Sensex from January 1992 to November 2019.
Over this nearly 28-year period, an investor in the Sensex would have earned approximately 12% CAGR. However, a large part of these returns came from a relatively small number of exceptionally strong months.
This highlights an important investing reality:
Missing just a few of the market’s best-performing months can significantly reduce long-term wealth creation.
Assume an investor had invested ₹1 lakh in the beginning of 1992. The outcomes would vary sharply depending on how many of the market’s best-performing months were missed during the investment journey.
As the figures above show, an investor who remained invested in the BSE Sensex between 1992 and 2019 would have earned nearly 12% CAGR over the ~28-year period.
However, missing just the best 6 months out of nearly 335 months would have reduced the return to almost 6% CAGR. Missing the best 12 months would have lowered the return further to nearly 2% CAGR — a dramatically weaker outcome.
What is even more interesting is that a significant portion of long-term market returns came from less than 4% of the total time period. For the majority of the time, markets remained volatile, flat, or range-bound.
The challenge is that these best-performing months are scattered unpredictably across market cycles and can only be identified in hindsight.
We reviewed several research studies and academic observations but could not find any consistent formula that accurately predicts when these exceptional months will occur. This reinforces an important principle:
The most reliable way to participate in long-term wealth creation is to remain invested rather than trying to consistently time market entries and exits.
In essence, periods of economic slowdown, pessimism, or negative headlines should not automatically lead investors to frequently alter their equity allocation. Long-term returns are often generated during short and unpredictable phases of strong market recovery, and missing these periods can materially impact wealth creation.
Looking at risk from another perspective
Equity is typically only one part of an investor’s overall asset allocation alongside fixed income, gold, real estate, and other assets.
Since equities are inherently volatile and subject to short-term fluctuations, prudent investors usually limit their equity allocation according to their risk appetite and financial goals. In other words, the risk associated with equities is already managed at the portfolio allocation level.
However, when investors repeatedly attempt to time market movements out of fear during corrections or slowdowns, they often end up reacting to the very volatility they had already accounted for through proper asset allocation.
As a result, investors may reduce their participation in equities precisely when long-term opportunities are emerging.
While equity markets may remain uncertain in the short term, staying disciplined and remaining invested through market cycles is often essential to participate in long-term wealth creation.
This reminds me of a quote- “There seems to be some perverse human characteristic that likes to make easy things difficult.” – Warren Buffett
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Yog Rajani
Ketan Pitrubhakta
Excellent write up and market opinion. I had invested s around 2,50,000 in 2001 and it was valued rs 14,00,000 in 2015 which were used in my younger son’s marriage.
Thanks, Chandravadan.. glad that you liked it!