As Ray Dalio said in his book Principles, there are events that keep repeating in one form or another, be it our life or be it the market in itself. Only if we learn from them, we get better in handling them. The point that I am trying to make here is if we look at the scenario we faced in 2018, we have a lot of resemblance from what happened in 2015. I will try to point those out in the blog “Market lessons from the past- Part 1 (2015 & 2018)”.
Market lessons from the past- Part 1 (2015 & 2018)
Sensex Data 2015-16
Market lessons from the past- Part 1 (2015 & 2018) " Year 2015"
Chinese Slowdown
Chinese economic slowdown was the news for the year. For the first time, the growth rate dropped from 7.3%in 2014 to 6.9% in 2015. Given the size of the country’s economy and it’s share of the global commodity manufacturing market(more than 50%), it was expected to send shivers with negative sentiments that commodity supercycle is going to end and moreover, market started to estimate the situation to be far worse than what is being put out in the public domain.
Fed Fund Rate Hikes
The other big event of 2015 was that of Federal Reserve(US Central Bank) which was expected to increase the interest rate after a hiatus of 8 years. The market was nervous on what will be it’s impact, given that it was the first time Fed was raising rate post the announcement of ‘Quantitative Easing‘(infusing liquidity or money into the economy) in 2007-08.
Indian Exchange Rate Fluctuations
As a result, the rupee depreciated which leads to the cost of manufacturing going up for raw material importing companies.
Historical Fed Fund Rates
Interest rate hike scenario in US causes Dollar to strengthen, implying weakening of other currencies. Weakening of currency means outflow of foreign capital.
Market lessons from the past- Part 1 (2015 & 2018) " Year 2018"
Chinese Slowdown
During 2017, the Chinese economy was able to pick some pace but the trade war which saw first China-specific tariffs being imposed in July 2018 along with curb on illegal financiers which was pushing the growth of several manufacturers, led to a slowdown in China. Stricter environmental norms was another factor.
All of these led to one of the major event “China moving into Current account deficit”(Imports> Exports) in H1 2018. You can read more here.
Fed Fund Rate Hikes
Similar to 2015, the interest rate hike in the US was another theme that played out.
The purpose of Quantitative Easing was to bring life into the US economy with an inflation target of 2% which they thought would push sustainable growth. With the US inflation rate crossing 2% since September 2017 every month, set the tone of the rate hikes in 2018.
Rising interest rate in the US implies capital flow moving back to the US on account of US currency getting stronger on top of higher Bond yield. This also implies depreciating other currency. But with the adverse effect of higher interest rate coupled with the negative impact of Trade war on the US, the Fed has already changed it’s stand on future rate hikes.
Indian Exchange Rate Fluctuations
While 2015 saw Brent crude prices fall from $60/barrel to $30/barrel, 2018 witnessed prices increase by almost $20 per barrel, thus pushing the rupee further down.
Coming to India specific events, to my view the biggest event of 2018 was the liquidity crisis at NBFC which began by IL&FS defaulting on interest payments, followed by DHFL and many more. Important because NBFCs drive the growth of many other industries.
Also, since the market looks for stability, the 2019 general election in India was a further deterrent to the market.
As you can see there are a lot of familiarity in these 2 years of market fall. It is much easier to analyze in hindsight but if we can keep these factors in mind and take a broader overview from time to time, entry and exit from our investment becomes a lot easier.
Further reading: