- Date : 19/09/2022
- Read: 3 mins
India’s long-term growth prospects continue to remain strong; however, it is not immune to events outside its borders. The stock markets are likely to struggle, but will this result in a correction, or will the global issues trigger a domino effect in India?
The Indian equity markets are expected to remain choppy amid global recession concerns. The US is not alone; other developed economies such as Japan, Finland, France, and Italy too are staring at a downturn. The ongoing Russia-Ukraine and China-Taiwan conflicts are only making things more difficult.
India’s long-term growth prospects continue to remain strong; however, it is not immune to events outside its borders. The stock markets are likely to struggle, but will this result in a correction, or will the global issues trigger a domino effect in India? But before we dwell on that, let’s clear up the difference between correction vs recession.
What is a correction?
A correction is an extended decline in the value of an asset or, in this case, the value of market indices such as Nifty 50, BSE Sensex, or a commodity index. Economic developments, regulatory or tax changes, and even global events may trigger a market correction, where investors tend to become cautious and book their position rather than feed on uncertainty.
In the last 30 years, Nifty 50 has witnessed over 19 corrections. As a standard gauge, a correction is considered to be a decline of over 10% from the indices peak but less than 20%. Anything more than 20% means the index is moving into bear territory.
What is a recession?
While there is no one clear way to define a recession, prolonged periods of economic contraction denoted by a drop in real GDP, employment and income levels, and industrial activity are indicators of a recession. A continuous decline in gross GDP over two quarters (six months) may be indicative of a recession.
Recessionary cycles could last for a few months or even years. Since independence, India has had five recessionary cycles, with the last one being as recent as 2020-21, owing to the global chaos caused by the COVID-19 pandemic.
Managing expectations and investments
So, are we currently looking at a correction or recession? Unfortunately, that question can only be answered in hindsight. A correction is more of a short-term event; but if it prolongs, it could turn into a recession.
Rather than making an offhand prediction of recession vs correction, as an investor, it is imperative to have a strategy that helps you tide over any adverse event(s). It starts with a diversified asset allocation strategy that is in line with your risk appetite and life goals.
A balanced portfolio spread across asset classes will be able to reasonably absorb short-term volatility. It prevents emotions from swaying your decisions, allows you to rebalance your portfolio and book profits where possible, and gain from rupee cost averaging for value stocks/investments.
Peaks and troughs are inherent to the cycle of markets. Whatever the phase we are in right now, it is not the first downturn and surely won’t be the last.