Last Updated on October 30, 2022 at 9:58 am
Two readers recently asked us similar questions. One asked, “Is it possible for the Indian stock market to again go through 10 years of poor returns?” The reference is to the ten years of a sideways market after the Harshad Mehta scandal broke.
For details, see: (a) Sensex at 50,000 & lessons from the 42-year journey (b) Sensex return is 16% plus over the last 41 years, but half of that came from just three good years! (c) 150% profit but only 9.6% return?! Why you should fear sideways markets.
Another reader asks, “The Chinese Stock Market has practically given zero returns (forget real returns even the nominal returns are zero) in the last 15 years. Can such a scenario happen in India in future, considering both countries have some similarities like huge populations etc.? If such a situation happens in India, most of the country would be in real trouble, considering most of us are banking on the stock market, delivering at least 8-9% returns, if not more. Forget early retirement even normal retirement would be impossible in that case. Can you share your thoughts on this, please?”
This situation – 10 years of poor stock market returns, aka a lost decade – can happen in any country, and it has in the past, even in the US. See Dollar Cost Averaging, aka SIP analysis of S&P 500 and BSE Sensex.
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So our investment strategy must always consider this possibility, and we must plan for it from day one. This is why our robo advisory tool uses a step-wise equity reduction plan well before the goal due date to combat the poor sequence of returns risk. Without a plan, we would be leaving the fate of our investments to luck. Our hard-earned money deserves better respect.
Now, no one can answer if India would again suffer a lost decade. However, we can consider the factors contributing to a strong equity market and their likelihood in India.
When we compared the Indian and Japanese economies – Can the Indian stock market keep falling like the Japanese stock market? – we saw that there are many differences between the two countries. The key differentiator was demand and population growth.
We will not dwell much into the reasons for China’s lost decade. It is outside the scope of our expertise. The US-China trade war, low or near-zero foreign investment, lack of institutional support (dominance by retail investors), higher corporate reliance on a fixed income than on equity, and a slowdown in domestic growth have contributed to a volatile stock market peppered with boom and busts. Also, many companies (esp. tech related) prefer to trade in Hong Kong and not mainland China.
Some of the factors that contribute to a strong economy and a strong stock market are:
- Democracy (including corporate governance). This is China’s biggest problem and plus point for India. Communism is not a financially viable idea. It made India bankrupt. Since the 1990’s globalization (new economic policy), continuous disinvestment, market-linked interest rates and pensions are some of the biggest contributors to India becoming the fifth largest economy.
- Ease of doing business: India has continuously made it easy for entrepreneurs and start-ups. Naturally, there is a lot of scope for improvement, but we cannot deny the rapid strides in this area.
- Institutional support: The stock market needs big players for stability. In the 1990s and 2000s, foreign institutional investors called the shots. Now domestic institutions play a big part in stabilizing our stock market.
- Population growth: We need a human base to drive demand. We have no worries here!
- Ease of spending: India is fast shifting from a savings-based economy to a spending-based economy. Today is quite easy to get a loan. Too much of this is bad for the stock market but so is too less. As with life, here, too, the right balance is not easy to find!
- Stable governments: This is essential for sustained market growth. An unstable political climate is one of the biggest contributors to India’s lost decade. We saw seven prime ministers in the nineties!
- Inflation and interest rates should neither be too large nor too small. Thankfully, both have been on a downtrend over the last 2-3 decades. See: FAQ: How inflation affects our ability to manage money.
- Stable currency: The rate at which the INR degrades wrt USD has significantly reduced over the last decade. See: Basics: Why does the Rupee fluctuate in value against the US Dollar?
- Ample foreign reserves: This is crucial for the country’s stability and currency.
- Peace and stable borders: This requires no further explanation.
- Stable world order: We cannot have countries often go to war with each other. This is, of course, beyond our control.
- Global warming and other destructive practices: Stock market returns have almost always come at a huge price: destroying the planet. How well we balance our avarice with preservation will determine our existence.
- Force Majeure events: We wake up every day taking our lives for granted. A meteorite, a solar flare, or thousand other events can end this real quick! See: Forget market crashes we will lose everything if this happens!
Among these, the factors that worry me the most are stable governments and the progressive destruction of the planet in the name of economic growth. The former only affects market returns, the later our and more importantly, the existence of our children.
Today, the Indian economy and Indian stock market are in a much stronger place compared to what they were in the 1990s and the corresponding situation in China. The relative probability of a lost decade recurring in India is significantly lower. So once we have a goal-based risk management strategy based on variable asset allocation in place, we can rest easy and focus on doing our bit to save the planet.
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