By Raj Khosla
The brutality of the stock market crash has caught everyone off guard. Within 20 trading days, starting 24 February, the Sensex has receded nearly 15,000 points or 36 per cent. Small investors, especially new entrants who started four-figure mutual fund SIPs (or systematic investment plans) about two-three years back because ' mutual funds sahi hai,' are shell-shocked. Last year, when the equity market rose and the benchmark indices hit all-time high levels, these new converts saw their SIPs churn out extraordinary returns.
The past 20 trading sessions, however, have brought them down to earth. With portfolios deep in the red, these first-generation equity investors are questioning their decision to venture into the stock market. In many cases, this decision to put money in stocks was taken by overruling the financial wisdom offered by older relatives. One can just imagine the acrimonious debates and bitter arguments they had to endure before they entrusted their money with Mr Market.
For such first-time investors, the current mayhem is a double whammy. They have not only lost money, but might even lose faith in the market. Rookie investors seldom fathom the risks associated with the equity market and losing 30-35 per cent of their principle can be a deal breaker, especially if it comes so suddenly. Even if their portfolios eventually come back into the black, many of these individuals may turn away from equities forever. Not just that, they may even advise others in their social circles and families to stay away from the stock market.
This is bad news, not only for asset management companies and wealth management outfits, but for the economy at large. Even before Covid-19, the economy was facing a structural slowdown. Passenger vehicle sales, which can be a proxy for consumer confidence, dropped almost 15 per cent in April-February 2019-20 compared to the same period of the previous year. The full year figure could be worse when the March numbers come in. Other sectors had also witnessed a decline in demand.
The demand could fall off the cliff now. In an ideal world, the stock market looks to the economy for direction. If the economy is flourishing, companies do well and so does the stock market. But in the real world, the tail also wags the dog. When the stock market is performing well, consumer confidence is higher. Individuals are more likely to spend and invest if they feel rich, which boosts consumption and is good for the economy.
This investor confidence has been badly dented in the past one month and could result in spending cuts as pauperised investors try to recoup their losses. The shopping plans of Indian households may get deferred or shelved altogether. Luxury purchases and discretionary spending are out of the question. The equity market is already down, but could go into a free fall from here.
The Government has constituted a task force to reduce the economic difficulties arising out of the pandemic. This is a positive move and could bring relief to the stressed segments of the economy. However, urgent steps are also needed to improve investor confidence, else the Covid-19 tsunami could make our worst nightmares come true.
(The author is Managing Director of MyMoneyMantra.)