Recession or Economic Slowdown?| 5 Point Analysis

4 min read
Recession means a drop in Gross Domestic Product (GDP), while an Economic Slowdown is merely a decline in the growth rate of Gross Domestic Product (GDP).

How To Manage Your Portfolio?

Introduction

In recent months, there has been a sharp loss of economic momentum in India. The big question is whether the ongoing slowdown is structural or cyclical. That is, whether it is a recession or merely an economic slowdown? Also, how to manage your portfolio in such scenario?

Recession or Economic Slowdown – How To Manage Your Portfolio?

Recession or Economic Slowdown?| 5 Point Analysis
Recession or Economic Slowdown?| 5 Point Analysis

1. Recession v/s Economic Slowdown

  • Recession means a drop in the Gross Domestic Product (GDP), that is there is degrowth in the country’s economy. For Example, the country’s (economy) GDP was at $2.5 Trillion last year and GDP has came down to $2.45 Trillion current year. That is GDP is falling. In such case, we say that there is a recession.
  • On the otherhand, an economic slowdown is merely a decline in the growth rate of the Gross Domestic Product (GDP). For eaxmple, the country’s GDP growth rate was 8% last year and this GDP growth rate has come down to 6% current year. That is GDP growth rate is falling, although the overall country’s economy is growing but at a slower pace.
  • Economists define a recession as three consecutive quarters of contraction of economy (ie. decreasing GDP). Here, Economic growth slips into negative territory during a recession. While, in case of an economic slowdown, also called as a ‘growth recession’ , the economy does not contract. It continues to expand, but at a sequentially slower pace.
  • In accordance with the above explaination, we can say that Indian economy is currently going through an economic slowdown.

2. Economic Slowdown & Trade War

  • The trade war has adversely affected the international demand for exports.
  • India’s exports contracted 9.71% in June 2019 (year-on-year) to $25.01 billion, the first fall this fiscal FY2019-20. High base effect, weakening of global trade contributed to fall in exports.
  • How badly can US protectionism hurt India? India’s exports to the U.S. could lose momentum. President Donald Trump has criticised India for its tariffs on U.S. products, and withdrew trade concessions on $6.3 billion of Indian goods on June 1. India responded with higher tariffs on about 30 American products.
  • China being the largest consumer of base metals, the current development should have a negative impact on prices of base metals. Revenues of Indian companies will be adversely affected.
  • Our economy should be an aspirational economy, where the aspirations should increase. And with the rising aspirations, the demand will increases hand-in-hand. As demand rises, inflation will rise. As the inflation increases, growth will be improved, with the returns as its bi-product. All these parameters are linked.
Financial Planning By Invest Yadnya
Financial Planning By Invest Yadnya

3. What Kind of Returns One Should Expect From Market in Such Turbulent Time?

  • One should expect the returns 5% above the inflation rate as far as Equity as an asset class is considered over the longer horizon.
  • As we have seen, 2018 and in 2019 also market was down, giving subdued returns. The major reason behind it is the fall in the inflation, much below the comfortable level, below 4%. The key impact of falling inflation is the slowdown in the demand, resulting the dropped sales and profits of the companies.
  • While designing your financial plan, you calculate the future value of your financial goals. We generally used to take inflation rate at 7%. And by adding the risk premium of around 5%, we used to calculate the expected returns of around 12% from the market. So, you should make your financial plan by returns expectation of 12% according to above calculation.
  • If the inflation rate will be subdued, then the subsequent final returns would also remain subdued.
  • Returns from Fixed income securities or government securities is also linked with the inflation annd the growth rate of the economy.
  • So, one should build the same expectation from his/her financial plan. For this, one should follow a process oriented approach rather than a product based approach. Thus, one should invest according to the defined financial goals. One should strictly avoid the short-term profit booking or trading in order to achieve the financial goals, beause afterall market is driven by sentiments and one can incurred losses in the current sentimental and turbulent scenario.

4. One Should Continue Their SIPs or Not?

  • It is not recommonded to start SIPs for the short-term financial goals ie. goals realising in less than 3 years.
  • One should make SIP for their long-term goals. If your SIP holdng period is more than 5 years, then you are not recommonded to make any changes in your SIPs. Never stop or discontinue your SIPs in the sentimental negativity.
  • The biggest advantage of SIPs is the accumulation of assets. Returns are just a bi-products of that assets. And in the subdued markets, your SIPs can purchase more number of units at a discounted prices. Volatility in the market helps in boosting the SPIs retuns in the long-term.

5. Expectations From Government

  • Automobile industry is demanding to the government to reduce their GST from 28% currently to 18%. As a result of which, vehicle prices will come down and helps in rising of sales. With the increased sales, the auto companies’ profits will increase and it may help in the turnaround in the sector.
  • Moreover, the credit growth is also one of the major issue in the market. The companies which are in need of credit or loans, are not getting the credit. Earlier, such kind of aggresssive corporate lending used to be done by PSU banks. But because of NPAs problems, banks are not able to lend at a greater scale.
  • After IL&FS crisis, NBFCs are also not able to raise the funds. As a result of which, the liquidity supply to the economy has slowed down.
  • Thus, things will start improving with the government support to the Auto, Banking and NBFC sector. The earlier optimism can be achieved in the economy.

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