The last bear market during the ICE meltdown in 2000-01 had bottomed out after 18 months. The jury is out on whether history will repeat itself.
Even after devouring investors' wealth worth $20 trillion so far this year, the US subprime crisis refuses to die down. This is the second time in the current decade that equity investors worldwide have suffered heavily due to US-created problems. The first time they took the hit was during 2000-2001, when the information, communication and entertainment (ICE) sector crashed following a slowdown in America.
This time round, capital markets across the world have been severely battered. Dow Jones has led the mayhem by declining 25 per cent from 14,164.53 on October 9, 2007 to 10,609.66 on September 17, 2008. Owing to larger defaults in developed markets, foreign institutional investors (FII) have pulled out their investments in emerging markets.
China has been hit the most with Shanghai Composite declining 57.4 per cent between January 8, 2008 and September 30, 2008. The Indian market, represented by the 30-scrip BSE Sensex, has declined 38.4 per cent. For comparative purpose, we have taken indices of world markets and emerging Asian markets between January 8, 2008 and September 30, 2008.
The BSE Sensex figured among the top three underperformers on both occasions (ICE meltdown & subprime), indicating that the Indian market has not yet decoupled from the world. During the ICE meltdown, the Sensex had declined 56 per cent from its February 14, 2000 peak of 5,924.31 to 2,600.12 on September 21, 2001. Among world indices, only Nasdaq (down 67.8 per cent) and Taiwan Taiex (down 64 per cent) were below the Indian benchmark index.
After the ICE crisis was over towards the end of 2001, Indian markets staged a smart recovery. On January 8, 2004, the Sensex rose to its February 14, 2000 intra-day high of 6,150. Except for a brief lull following the NDA's defeat in the May 2004 general elections, Indian markets never looked back.
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The India growth story - mainly a GDP growth of 9 per cent every year for the next 10 years -- went down well with foreign investors, who pumped Rs 178,355 crore in the domestic market between June 2004 and October 2007.
No wonder, the Sensex kept rising even after the US housing bubble surfaced in October 2007, putting to an end the bull-run in the US and Europe almost immediately. But the rise of the Sensex at this point in time gave birth to the so-called decoupling theory. The Indian benchmark index hit an all-time, intra-day high of 21,200 on January 8, 2008, from which day the slide began.
Foreign investors, who led the India show between 2004 and 2007, proved the decoupling theory wrong by pulling out over Rs 100,000 crore from the cash market between mid-October 2007 and September 30, 2008. The reason: concern over the subprime crisis causing damage to the banking sector, leading to credit losses and asset write-downs worldwide, affected the FII sentiment.
India Inc has lost over Rs 35 lakh crore in market capitalisation (m-cap) following a plunge in the BSE Sensex since early January this year. Banking, realty, refinery and power stocks have been the biggest losers with their m-cap slipping by over Rs 2.25 lakh crore each. Telecommunication, trading, technology, engineering, mining and steel companies have reported value erosion of Rs 1-1.73 lakh crore each.
| TECH TRAGEDY (in 2000-01) Top Losers | |||
| Price in Rs | Feb 14 ‘00 | Sep 21 ‘01 | % change |
| NIIT | 396.66 | 11.54 | -97.09 |
| Infosys Technologies | 1344.99 | 276.41 | -79.45 |
| MTNL | 348.30 | 111.00 | -68.13 |
| Larsen & Toubro | 219.50 | 75.95 | -65.40 |
| Tata Motors | 156.34 | 67.09 | -57.09 |
| ICICI Bank | 169.55 | 74.65 | -55.97 |
| GlaxosmithKline Pharma | 581.35 | 258.85 | -55.47 |
| Ambuja Cements | 41.53 | 18.78 | -54.78 |
| Indian Hotels | 23.30 | 11.24 | -51.76 |
| ACC | 198.10 | 101.75 | -48.64 |
| Feb 14, 2000 IT boom Price adjusted for bonus and right issues | |||
Even after this unprecedented erosion in market value, the bottom is nowhere in sight. The last bear market during the ICE meltdown had bottomed out after 18 months, and it took another 28 months for the market to regain its previous high levels. The Sensex had declined by 56 per cent then. This bear phase is just nine months old. And analysts say this one too is not going to end in a hurry.
The market is at an alarming position right now, and it is unlikely to bottom out very soon even though the Sensex price to earnings (P/E) ratio is reasonably high at 16.6 times. At the lowest level of the ICE meltdown, the Sensex P/E had fallen below 10 times.
According to a study, the market has averaged 1.3 per cent in the 25 weeks that it has fallen since its January peak. This is slightly higher than the average of 1.1 per cent in the first 25 weeks of the previous three bear markets. If it accelerates, it could mark an early end to the bear phase, because in such a scenario, the market will reach its bottom early.
Economist Chetan Ahya, Executive Director, Morgan Stanley, says based on historical evidence, the market could take 18 months to bottom out.
However, if the bear market ends in another 25 weeks, this will be the shortest bear phase in the past 20 years.
Going by past experience, the pace of price fall is likely to slow down in the coming weeks. The previous two bear markets had an average weekly fall of 0.3 per cent after the first six months.
If India Inc performs well in the upcoming results season and the Reserve Bank of India takes some market-friendly measures in between, then a quick recovery in the market is possible.
| HOUSE COLLAPSE (since January 8, ‘08) Top Losers | |||
| Price in Rs | Jan08 ‘08 | Sep 30 ‘08 | % change |
| Jaiprakash Associates | 462.00 | 111.10 | -75.95 |
| DLF | 1150.59 | 352.40 | -69.37 |
| Reliance Infra | 2536.00 | 790.30 | -68.84 |
| ICICI Bank | 1333.50 | 534.85 | -59.89 |
| Reliance Comm | 804.30 | 333.90 | -58.49 |
| Tata Motors | 752.29 | 344.20 | -54.25 |
| Tata Steel | 891.80 | 425.60 | -52.28 |
| Grasim Ind | 3400.60 | 1687.60 | -50.37 |
| Hindalco | 189.71 | 97.70 | -48.50 |
| Larsen & Toubro | 4332.70 | 2442.85 | -43.62 |
| Jan 08, 2008 market all-time high Price adjusted for bonus and right issues | |||
However, in the second quarter of the current financial year, earnings of Indian companies, including those in the Sensex, are expected to be lower than the 14-15 per cent recorded in the first quarter. Analysts believe that capital goods, consumer goods, telecom, IT services and pharmaceuticals will drive growth, while energy, metals and others will put up a poor show.