In the aftermath of the global liquidity crisis and fears of a global recession, Indian stock markets have also been hit and it may be some time before they stabilise.
World over, the bulls have clearly been overpowered by the bears, and last week’s collapse seen across all global indices is proof of the same . Nearly half the decline in the value of these indices (since the beginning of the year) has been in the last week.
As far as the Indian markets are concerned, the BSE Sensex, which accounts for nearly 50 per cent of the total market capitalisation of listed stocks on the BSE, declined by nearly 16 per cent in the last one week, taking the total decline since the beginning of the year to 48 per cent. But, have the country’s fundamentals changed so dramatically warranting such a fall? It’s still too early to say that. So, what has led to this grim situation and how long will the pain last? Read on to know the answers.
The global crisis
The mis-pricing of credit and derivative instruments in the US is where the problems started, and later spread to other regions of the world including the UK, Europe, Japan and other Asian countries. The worrying factor is that what started as a US subprime crisis has now evolved into a global financial crisis, wherein liquidity has almost dried up. The current crisis is unique as it is the worst the world has seen in many decades. The concerted efforts of central bankers in developed nations to pump in billions of dollars into their respective financial systems, followed by their commitment to come up with more funds to restore confidence into the system only points towards the seriousness of the problem. However, such confidence building moves have only provided relief in the short-term; to be precise, for not more than a few days.
The fear levels are now running high and have engulfed the investing community in a big way. And, India is no exception. Says Tridib Pathak, CIO-equities, Lotus Mutual Fund, “We are seeing collateral damage of a global financial meltdown. Now, this is leading people to believe that there is going to be a global recession.”
There is no stopping of bad news either, which is pouring from everywhere. In fact, some experts believe that the US is already in a recession. Last week, Singapore, too, announced that the country had slipped into a recession. With every passing day, the market is seeing an increasing probability of a global recession.
The International Monetary Fund’s belief that the world’s developed countries will grow at the slowest pace in 2009 since over two decades is further proof of the pudding. Little wonder then that stock, commodity and currency values across global markets are taking a knock. For instance, the Dow Jones Industrial Average fell by almost 19 per cent last week, to close at 8,451.19 points, its lowest since May 2003.
FIIs pulling out
India, which was among the most favoured investment destinations among emerging markets till recently, has been no exception. Foreign institutional investors (FIIs), which have been net buyers of Indian stocks in the past seven years (2001-2007) with the highest purchases worth Rs 71,952 crore seen in 2007, have sold stocks worth Rs 41,353 crore in 2008 (till October 8, 2008). The liquidity crunch globally is the key driver of the exodus from India as well as other countries. Adds Pathak, “It seems like a forced liquidation (FII outflow) than any significant change in the fundamentals of the Indian economy. It is more of what is happening in the international markets. The sell-off in India is in line with the sell-off in global markets.”
Worries aren’t over, yet
Experts are certainly not positive on Indian markets, at least in the near-term. And, the reasons are not surprising. Says Ambareesh Baliga, vice-president, Karvy Stock Broking, “In the near-term, we don’t know where the markets will go as there is no sanctity for fundamentals or technicals.” He adds that when there is stampede, nobody reasons out, even if people (government, regulators etc) say that everything is fine.
“No soothing words from the leaders would have any visible effect on our markets unless and until it is backed by action which can cushion the onslaught of panic sales. We can’t use any precedents to tackle this unprecedented situation, and hence, we need to take certain actions which can change the doomsday anticipation of investors.”
Additionally, instances of some companies (including Bhushan Steel and JSW Steel) postponing their capacity expansion plans and the poor response to Hindalco’s rights offer, only indicates that the pain for certain segments of the domestic economy is only rising.
One thing that provides some confidence is our overall regulatory environment. Says an expert, “As far as India is concerned, there have not been any market-based circuits, no major bail-outs, no nationalisation of companies and no major restrictions on trading. Very few countries have seen such times. Also, as a country, we haven’t seen any decline in interest rates, which indicates that there is ammunition (reduce rates) to use if the need arises. In that sense, whenever the markets recover, our re-rating should be sharper.”
The way ahead
The Indian markets may still be away from bottoming out, but they aren’t very far, suggest experts. The consensus is that the bottom could be somewhere close to 9,000-9,500 levels, which is about 9-14 per cent from current levels on the Sensex. Meanwhile, the uncertainties and market volatility may continue for some more time. The moderation in economic and industrial growth also means that the deceleration in earnings growth for corporate India will continue for a few more quarters. Notably, a large part of these concerns, except for surprises, are already reflecting in stock valuations.
On the other hand, there are some signs of positive changes at the macro level, which though may take a few months to reflect in the numbers. Says Suresh Soni, CEO India, Deutsche Asset Management (India), “The impact of lower crude oil and commodity prices on inflation should at some time reflect in lower interest rates. The consequent fall in crude oil prices on the subsidy bill (oil and fertiliser) for the government is also expected. These macro changes are currently being ignored by the market.”
In the light of the overall environment, what should investors do?
Says Soni, “In view of the fall in valuations, it may be time to look at investing from a long-term perspective.” Pathak, too, is of a similar view and adds, “If not now, when will one invest? Now is a good time to invest, but with a three-five year perspective.” Valuations, too, are quite low. To give some numbers, the BSE Sensex is quoting at a one-year (FY09) forward PE of under 11 times, which is below the median PE of 12.8 times.
However, experts also recommend some caution, given that earnings growth is likely to decelerate in the coming quarters (as compared to over 20 per cent seen in the past three-four years) and also the fact that not all sectors and companies are likely to do well. With regards earnings growth, Baliga believes that in FY09, earnings growth would be 14-15 per cent, while in FY10, it should be 12-14 per cent.
| WORLD INDICES | |||||
| INDEX | REGION | Current Close | % Chg Ytd | % Chg w-o-w* | PE.... ratio (x) |
| DOW JONES INDUS. AVG | North/Latin America | 8451.19 | -36.29 | -18.15 | 10.48 |
| S&P 500 INDEX | North/Latin America | 899.22 | -38.76 | -18.20 | 17.23 |
| NASDAQ COMPOSITE INDEX | North/Latin America | 1649.51 | -37.81 | -15.30 | 27.04 |
| S&P/TSX COMPOSITE INDEX | North/Latin America | 9065.16 | -34.47 | -16.09 | 11.23 |
| MEXICO BOLSA INDEX | North/Latin America | 19905.27 | -32.61 | -13.42 | 8.93 |
| BRAZIL BOVESPA STOCK IDX | North/Latin America | 35609.54 | -44.26 | -20.01 | 8.79 |
| DJ EURO STOXX 50 = Pr | Europe/Africa | 2421.87 | -44.95 | -22.22 | 7.24 |
| FTSE 100 INDEX | Europe/Africa | 3932.06 | -39.10 | -21.05 | 7.40 |
| CAC 40 INDEX | Europe/Africa | 3176.49 | -43.42 | -22.16 | 8.16 |
| DAX INDEX | Europe/Africa | 4544.31 | -43.67 | -21.61 | 8.89 |
| IBEX 35 INDEX | Europe/Africa | 8997.70 | -40.74 | -21.20 | 7.14 |
| S&P/MIB INDEX | Europe/Africa | 20309.00 | -47.32 | -21.62 | 6.68 |
| AEX-Index | Europe/Africa | 258.05 | -49.97 | -24.99 | 4.52 |
| OMX STOCKHOLM 30 INDEX | Europe/Africa | 622.98 | -42.39 | -20.17 | 8.44 |
| SWISS MARKET INDEX | Europe/Africa | 5347.22 | -36.98 | -22.28 | 31.50 |
| NIKKEI 225 | Pacific Rim | 8276.43 | -45.93 | -24.33 | 9.96 |
| HANG SENG INDEX | Pacific Rim | 14796.87 | -46.80 | -16.32 | 9.05 |
| S&P/ASX 200 INDEX | Pacific Rim | 3960.70 | -37.53 | -15.65 | 10.56 |
| TAIWAN TAIEX INDEX | Pacific Rim | 5130.71 | -39.68 | -10.65 | 8.60 |
| KOSPI INDEX | Pacific Rim | 1241.47 | -34.56 | -12.55 | 10.02 |
| STRAITS TIMES INDEX | Pacific Rim | 1948.33 | -43.78 | -15.18 | 6.23 |
| STOCK EXCH OF THAIINDEX | Pacific Rim | 451.96 | -47.33 | -23.40 | 7.23 |
| JAKARTA COMPOSITE INDEX | Pacific Rim | 1451.67 | -47.13 | -20.78 | 9.04 |
| SHANGHAI SE COMPOSITE IX | Pacific Rim | 2000.57 | -61.98 | -12.78 | 15.58 |
| BSE SENSEX | India | 10527.90 | -43.58 | -15.95 | 10.68 |
| S&P CNX NIFTY | India | 3279.90 | -39.72 | -14.10 | 11.44 |
| * w-o-w: Change over October 3, 2008 Source: Bloomberg | |||||
Barring some aberrations in quarterly profit growth, Pathak believes that earnings will grow at a CAGR of 15-20 per cent. But he adds, “The most important thing is that, there is going to be a huge divergence. In the context of the global slowdown, there are going to be sectors which are going to face the music. So, there will be divergence in terms of performance within sectors. Stock selection and portfolio construction will therefore be crucial.”
To conclude, overall, and in terms of asset classes, in the near-term, sitting on some amount of cash would make sense, while a small part of the portfolio could also be parked in gold. And, within the equity portfolio, the focus should shift on to large-cap stocks, which are leaders in their respective businesses. Large-caps are also expected to deliver relatively better earnings growth, as compared to the mid- and small-cap companies.
