Lessons from historical bear markets: Indian

Now that you’re aware of bear markets and their significance, it’s time we take a look at the various lessons that we can learn from bear markets of the past. In this chapter, we will be focusing solely on the Indian stock market and the various downturns that it has witnessed over the years. Let’s begin with a short overview of the bear markets that the Indian stock market has seen in the recent past, followed by the lessons that we need to take away from them. 

Lessons from Indian historical bear markets 

Since 1992, the Indian stock market has gone through as many as 10 bear markets. With the exception of one, all the other 9 bear markets lasted for a year or more. Here’s a quick look at a few of the most recent bear markets that we’ve witnessed till date. 

1. The COVID-19 meltdown

Although the COVID-19 pandemic is considered to have been around from earlier, most countries in the world woke up to its existence and started to take it seriously only in the second half of February, 2020. A rapid meltdown of the Indian stock market ensued, starting February 17, 2020. The bears were in complete control, with each trading day making lower lows than the previous session. 

With both Sensex and Nifty having lost several thousand points, the last week of February, 2020 was completely dominated by the sellers and quickly became the worst ever week for the Indian stock market since 2009. Though the hold of the bears was intense, the bear market lasted only till March 30, 2020, making it one of the shortest in bear market history.

Key lesson: Do not give into the selling pressure 

The stock market crash of 2020 was essentially an overexaggerated knee-jerk reaction to the official announcement of the COVID-19 pandemic by the W.H.O. The bear market was fueled primarily by negative market sentiment and panic selling, and had little to no underlying fundamental or economical factors. This is primarily the reason why the markets were able to bounce back up so quickly, within just a matter of a month. 

Due to the sharp decline in stock prices, many investors were quick to sell their holdings and squared off their positions at a loss instead of waiting for the market to recover. However, the lesson to take away is that the stock prices of fundamentally good companies are bound to bounce back up at some point after the passing of the bear market. So, all that you need to do is hold onto your positions patiently and wait for recovery. 

To put it simply, the key takeaway from this bear market is that as an investor, you should first try to assess the underlying cause before giving into the selling pressure created by the bear market. If the underlying cause is not fundamental and is driven by market sentiment and emotions, the best thing to do may be to hold on to your position.

2. The Chinese effect

Over the last few decades, Yuan, the official currency of China, had made great strides in terms of value appreciation and stability. It was fast becoming one of the most popular currencies amongst investors and currency traders. However, in a wildly surprising move, the People’s Bank of China (PBOC) suddenly devalued its currency in 2015 for three consecutive times, bringing its value down by as much as 3% to 4%. 

The move was sudden, unexpected, and weakened the Chinese currency against the U.S. Dollar considerably. However, it also had an impact on the Indian economy and the stock markets. Since the U.S. Dollar gained strength overnight due to the devaluation of Chinese currency, the demand for USD shot up. This led to traders and investors selling the Indian Rupee and investing the same in the USD, thereby weakening the INR even further to a two-year low.

The weakening of the Indian Rupee severely impacted imports, raising costs and eating into the profits of companies. In addition to that, the devaluation of Yuan also put more pressure on Indian exporters due to an increase in competition from Chinese companies and lower margins. All of these factors led to one of the biggest stock market crashes in India, where the Sensex and the Nifty fell by around 1,624 points and 490 points respectively on August 24, 2015.

Key lesson: Pay attention to currency risk

One of the lessons that this bear market taught investors and traders is that currency risk is something that shouldn’t be taken lightly. And so, when you are investing in sectors that are very much prone to currency fluctuations, it is essential to hedge the risk in order to avoid any significant losses.

In addition to that, this incident also reiterated the fact that the currency market and the stock market are more closely related than what investors and traders give them credit for. And any sharp and significant changes in the currency market are likely to affect the stock market in a big way.

Therefore, when investing in sectors that have high exposures to foreign currencies and exchange rates, it is a good idea to always keep a close watch on the currency market and its daily movements.

3. The struggles of the Indian banking system and global factors

Just when the markets were starting to show signs of recovery from the 2015 crash, the Indian stock markets had to bear the brunt of another major shock. In a span of just 3-4 months, from November 2015 to February 2016, institutional investors pulled out as much as Rs. 17,318 crores from their investments. That’s not all. In just four trading sessions in the month of February, 2016, the BSE had seen another major loss of around 1607 points.

The reason for the formation of this bear market was chalked up to the rising Non-Performing Assets (NPAs) of Indian banks. Many Indian banks, especially those in the public sector, were found to have NPAs worth several thousands of crores. With no proper recovery plan in sight, this news caused a huge uproar in the Indian stock market and led to a sell-off. This bear market was further exacerbated by a general global weakness. There was little respite in sight as the markets tumbled again on November 09, 2016, fueled by the demonetization announcement by the government of India.

Key lesson: Portfolio diversification is important

During the latter half of 2015 and the whole of 2016, the market saw more downs than ups. Investors of the Indian banking sector, who firmly believed in its future growth potential, were given a rude awakening in the form of rising NPA numbers. One major takeaway from this crash that many investors seem to have learnt the hard way is the importance of portfolio diversification. 

The stock market crash of 2016 essentially taught investors that having all their eggs in one basket, which in this case was the Indian banking sector, is detrimental to the wealth creation process. It also drove home the point that through proper and systemic diversification of investment portfolios, investors can surely minimize the impact of a crash to a large extent. In the context of global weaknesses and demonetization, diversification of stock portfolios can go a long way when it comes to protection of your investment.

Wrapping up

As you’ve already seen above, these three bear markets are by no means the only ones in Indian stock market. One major bear market that we haven’t discussed here is the 2007-2008 stock market crash. This is because the trigger for that market was an international event, and we will be covering this in the next chapter of this module.

A quick recap

• Since 1992, the Indian stock market has gone through as many as 10 bear markets. With the exception of one, all the other 9 bear markets lasted for a year or more. 
• The most recent one was the crash following the outbreak of COVID-19. With both Sensex and Nifty having lost several thousand points, the last week of February, 2020 was completely dominated by the sellers.
• Though the hold of the bears was intense, the bear market lasted only till March 30, 2020, making it one of the shortest in history. 
• Another major bear market in the Indian context occurred in 2015, when the People’s Bank of China (PBOC) suddenly devalued its currency for three consecutive times, bringing its value down by as much as 3% to 4%. 
• The move was sudden, unexpected, and weakened the Chinese currency against the U.S. Dollar considerably. This led to one of the biggest stock market crashes in India, where the Sensex and the Nifty fell by around 1,624 points and 490 points respectively on August 24, 2015. 
• Just when the markets were starting to show signs of recovery from the 2015 crash, the Indian stock markets had to bear the brunt of another major shock. In a span of just 3-4 months, from November 2015 to February 2016, institutional investors pulled out as much as Rs. 17,318 crores from their investments. 
• The reason for the formation of this bear market was chalked up to the rising Non-Performing Assets (NPAs) of Indian banks.