Understanding Economic Cycles To Beat The Markets!

Economic activity is not linear – it is cyclical. Long term equity investors need to have good insight into the economic and business cycles which are nothing but periodic expansions and contractions of economic activity. Yogesh Supekar and Karan Bhojwani do the reality check to understand where the market might be headed!

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Equity investors have been extremely confident about the long-term growth prospects that India has to offer. The confidence for the long term investors comes from political stability in India, its demographic dividend and corporate performance. Moreover, business models working fine for a majority of the businesses, big corporates flaunting healthy balance sheets, consumption story driving the growth, abundant liquidity in the system, controlled fiscal deficit and many more aspects unique to the Indian economy magnified the healthy perpetual growth in Indian economy.

Suddenly, the unchallenged aspect of the Indian equity market story – the strong and durable economic growth (GDP) – appears to be fuzzy. The very strength of the Indian equity market has become its weakness. And that is impacting the psyche of market participants, i.e brokers, wealth managers and especially the investors.

When the GDP growth touched 5 per cent in the latest quarter, it got confirmed that we are indeed in the midst of an economic slowdown. We do not need government officials to admit that we are in a slowdown and that macros have been decelerated. If we consider the nominal GDP growth, it has come down to 7.6 per cent from 12-odd percentage points. The GDP growth has hit almost a 16 years low.

What has triggered the slowdown?

The economic slowdown and its protracted nature has surprised several market observers. Many would attribute the current slowdown to the lack of demand for goods and services in the economy. The private consumption has slowed, and the investment is being impacted throughout the economy.

We attribute the current slowdown to following four factors:

Disruptions and poor implementation : The slowdown could