The sentiment on the street eerily looks similar to the one we
saw during 2HFY09, post collapse of Lehman Brothers. In those days, the rumors
of large banks declaring bankruptcy, sovereign defaults, imminent EU breakup,
market freeze, sounded absolutely believable. These were not only market
grapevines believed by the common investors. Many senior analysts at global
investment banks wrote scary reports about these eventualities. Globally
reputable, economists and strategists pained doomsday scenario of global
economy slithering into a deep abyss to compete with the great depression post
WW-I.
In India, many depositors transferred money from private banks
to the public sector banks. Investors summoned their advisers for details of
their liquid fund portfolios. The fixed maturity plans (FMPs) backed by bank
CDs were pre redeemed by paying penalties. Capital protected structured
products were also called prematurely by incurring material losses.
Some of the readers have likened the current situation to the
2009 panic sell off. A few believe that going by the reactions of central banks
in the developed world, it appears to be already worse than 2009. Many readers
have wanted to know my view as to how much worse it could go before the rock is
hit.
To all my readers, I would request that I am no Taleb, Rajan, or
Roubini who can assess the gravity of situation and make a prophecy almost
instantaneously. I am an ordinary micro investor in the local Indian financial
markets, who can access the data relating to past trends with some efforts and
roughly correlate that data with the present conditions to make a naive
assessment of the situation.
My assessment of the present situation is that presently we are
nowhere close to the rout in asset prices seen in 2009. In 2009, Sensex had
ended 18% lower than the July 2006 level from where the bull market had
started. The BSE Midcap and BSE Small Cap had ended the cycle 36% and 41% lower
than the starting point.
The current bull market started from end of February 2016. As of
yesterday, the Sensex was higher by 36% from the start date. BSE Midcap and BSE
SmallCap were higher by 24% and 16% respectively. Besides, the gains recorded
during 2006-2008 were much higher than the gains made during 2016-2018. The
severity of the fall in 2008-09 was therefore much more intense and deeper.
In my view, we may not a fall like 2006 this time, because of
the following four simple reasons:
(a) Foreign investors had
pumped in huge money during 2004-2008 in Indian equities. This time they are
huge net seller during 2016-2020 period.
(b) The earnings growth
fell off the cliff during FY09 to FY11 period leading to de-rating of Indian
equities. This time the earnings growth has remained anemic and has little
scope to disappoint materially. In fact it may surprise on the upside from
2HFY21 onwards.
(c) Indian's economic
growth has seen multiple downgrades in past two years, unlike 2008-10 when the
world had great expectations from India's economy.
(d) Presently, the leverage
in Indian stock market is significantly lower than the 2008-09.
Nonetheless, we may certainly fall further from the present
level, before hitting the rock.
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