In a year full of less than happy events, the GDP data for April-June Quarter 2020 which has shown a 23.9% drop compared to a year ago is one thing that is weighing heavily on market experts and investors. Almost every sector apart from agriculture contracted like never before.

This has led everyone from eminent economists to business publications raising the alarm. Two consecutive periods of contractions in the GDP is considered to be a recession or at least the beginnings of one. The data tells us that we are in one.

Is it really that surprising?

Sometimes one doesn’t need an economist or panel of data collectors to tell you that something is off with the economy. The unprecedented lockdown due to the COVID-19 pandemic has hammered businesses across the length and breadth of the country. Demand for most goods and services is at an all-time low as the world grapples with the sudden brakes on the economic engine.

Most countries, and not just India, are badly hit economically. The size of the Indian economy and the associated variables means that we may be hit more than others. The numbers simply indicate what anyone running a store will tell you over a cup of tea. Alarming perhaps, but surprising? No. 

What do the markets say?

Most market professionals believe that the equity markets in the country had accounted for this, if only to a greater or lesser extent. With the Moody’s ratings downgrades in July, nobody was under any delusions about the state of the GDP.  The numbers that officially came out merely confirmed this and are hard-hitting because we haven’t seen numbers this bad in the history of the country. 

These are unprecedented times and no chart will tell you how things pan out from here. Markets towards the beginning of September also perhaps reflect this uncertainty as they lost their earlier enthusiasm which seemed to fly in the face of the ground reality of the economy.

What’s an investor to do?

Considering the doom and gloom scenario being painted by everyone – and you might think even us – what’s an equity investor to do? We asked this question to our in-house experts and the answer while simple is again not surprising. Stay invested and continue investing.

Right now, someone who has a good emergency fund and adequate allocation (perhaps 2-3 years of their earnings worth) in fixed income-based instruments would be disappointed but not unduly worried by the GDP numbers.

Why?

Equity investing is a long-term endeavour precisely to account for various hiccups that every economy faces with some regularity. This is also why investors who have been through an economic crisis or two are such firm believers in asset allocation. 

Right now, someone who has a good emergency fund and adequate allocation (perhaps 2-3 years of their earnings worth) in fixed income-based instruments would be disappointed but not unduly worried by the GDP numbers.

Asset allocation protects investors from the vagaries of economics and markets. India is a resilient nation as well as a resilient economy and will recover sooner rather than later. Even a government stimulus as being suggested by many economic experts is more likely than not. 

History tells us that economies have recovered from wars, epidemics, and economic fiascos. Even the great depression didn’t last forever and despite the dire numbers seen in the media recently, a long term investor would be better served by continuing with their investments, especially if they have an effective asset allocation strategy in place. 

Even if we see a further correction in the market as was seen earlier in the month of March, stopping your equity investments would make little sense if your horizon is measured in decades. If your horizon is less than five years, you should anyway not be exposed to equity. 

A word to the wise

Protect your immediate and near term future with an emergency fund and adequate allocation to fixed income. The long term future is still linked to the growth of India’s companies and they have a history of surviving and soon thriving. The recent announcements of India’s biggest conglomerates attracting impressive funding is a case in point.

Staying invested in equity to the tune of what you don’t need in the near future and that will help you retire peacefully is the most logical decision at this juncture. 

Worrying about bad news is natural but letting it guide you towards bad decisions is not. So stay invested and stick to an asset allocation approach that works for you.