Stock markets collapsed on the concerns of recession and fears of banking system problems. Obama failed to inspire investors as his bailout plan will take time to yield desired results. Wipro announced disappointing results and gave poor guidance. Dow Jones suffered worst ever inauguration crash despite "Big unrealistic Hope" among ordinary Americans about Barack Obama and his stimulus package.
Courtesy: Bloomberg.
Stock Markets: What happened in 2008?
The Indian stock market witnessed a historical bull run until the early part of the Calendar year 2008 with Sensex touching exuberant levels of 21000. Just as the night arrives after every shining day, or just as the gravitational theory points out that everything that goes up has to come down; even Sensex succumbed to excessive selling pressure and contracted to unprecedented 9000 levels as I am writing this – in the process giving up more than 50% from the peaks recorded. The bubble of over-confidence and unbeatable growth scenario which was built over last 5 years of Bull Run got burst in just 1 year of excessive pessimism. India’s GDP growth which was expected to quote in double digits in next few years, in fact, inched lower from 9% to 7% in FY 2008-09.
Sub prime Fiasco:
It all started with a sub prime mess in the developed countries, especially, in US- around Sept 2007. Still Indian markets rallied hard for the next 3-4 months on the back of over-exuberance and under-estimating the global spill over effects of the sub prime fiasco. But, as the US rot started having contagion effects over other developed countries, the issue raised some signs of concerns across the globe including India. As more and more skeletons started to come out from the western cupboard, Indian stock markets started to show signs of cracking out. Indian stock market, which was once being touted as being decoupled from developed markets, showed signs influenza to even a sneeze from US.
Liquidity Crisis:
Ballooning Sub prime mess gave birth to Liquidity crisis on the back of lack of confidence. Even individual banks started to look other peer banks with an eye of suspicion. Over night bank rates jumped to record levels. This is a clear crisis of confidence consequently giving birth to liquidity crisis. Bank rates recording highs, is the worst crisis in terms of liquidity. It depicts the depressing level of crisis in the financial system. This could only be solved by Government assurances, the world over, for their banks and other lending institutions. Some co-coordinated yet situational calls were taken by financially heads globally. Even India became a coordinated part of this effort as it started with lowering Cash Reserve Ratio followed by several other follow-up monetary measures including further lowering of CRR, Repo rates and SLR.
Big Fall-outs:
Big names like Lehman Brothers which had survived earlier depressions went down under. Other big names like Bear Stearns, Citi Group, AIG, etc. were no resistance for the panic gripped market and were bailed out in either direct or indirect measures by US Fed. US Government went on with the unimaginable proportion of bailouts which now seems could be only good enough to buy ‘some more time. Auto giants like GM were the worst affected from the recession and needed the same treatment from US government. All the Big 3 auto companies GM, Ford and Chrysler were severely affected by the slowdown. But, US could not have afforded to let these Auto giants go down under, as not only the direct employment would have turned even more ugly but even the big industry of sundry auto ancillaries would have had a knock out punch, thus aggravating the problem at hand.
Bigger Bail outs:
It is debatable as to what long-term form these huge bail outs will take over a period of time. At the end of the day, these bail outs are nothing but tax-payers money. And, when government is using it to support private companies; they have to ensure some amount of caution about the prospects of big money being used for nationalization of companies. It will absorb long time before these government expenditure towards bail outs return back with some kind of profitability. In fact, some companies whom bail outs were offered are back in contention for yet another hand of help; thus putting in question the prospects of previous bail out attempts of tax-payers money. Only time will tell who will be the ultimate beneficiary of the current bail outs attempts- whether tax payers or private companies enjoying the bail outs?
Inflated Prices:
From all the above shocks, the world economy as a whole is slowing down including emerging markets which are coupled to a large extent to the Global economy through globalization. Some emerging countries may be less dependent and coupled than others, but coupled that they will remain surely at least to some extent. Most of the top developed economies are already in recession, with zero or negative growth. This has led to fall in demand of goods and services consequently leading to fall of most of the inflated commodity prices. All commodities, except Gold to some extent, have been a part of synchronized global bear market.
From what was the main concern of most of the economies in the form of high Inflation, has started to come down to moderate levels. This has given room to most of the economies to lower interest rates in their respective economies to deal with the slowdown. This, in effect, will help in disbursing liquidity in to the markets, in general, at lower interest rates and help in stimulating over-all demand. Though, the whole demand scenario, which is severely hit by global slowdown, won’t be stimulated by such monetary policies only. It needs to be coupled with other fiscal measures and Government expenditure towards infrastructure.
It will be a long and painful process to overcome the current cyclical downturn as it is a synchronized global phenomenon. Even Crude oil established its highs and lows in the same year; something that was touted as a supply shortage just a year back, has now transformed into demand shortage. Inflation figures have taken a substantial dip from their peaks and are still in the process of bottoming out. This will allow various economies of the world to concentrate on managing growth rather than taming inflation.
(Un) real-estate:
Real-estate was the buzz word a year ago. More and more houses were been bought by middle stratum of people on loan, on the back of over-all momentum. The prices were escalating to higher and higher levels by every passing day. A year ago, as interest rates were also on the upward momentum on the back of higher inflation; something had to give in either real-estate prices or interest rates. Surprisingly, just as the global slowdown was settling, none of the real-estate prices or interest rates was giving in too fast. Over-exuberance in real-estate prices started to stagnate as interest rates peaked. Slowly, interest rates started to come down on the back of lower inflation and synchronized global monetary measures, and even demand for real-estate came down to realistic expectations of property prices.
The construction companies are still not willing to lower the rates and dispose off their excessive stock. The real-estate prices did moderate to some extent in some Tier 2 and Tier 3 cities, but remain reasonably strong in Tier 1 cities like Mumbai. Hopefully, as the slowdown effect will get more pronounced in current calendar year 2009, even prices in top cities will moderate with time. Demand and supply scenario of any product can be fiddled with for some time, but not for all times.
Indian Stock Markets:
Coming back to Indian stock markets, Indexes like Sensex and Nifty plunged around 60% from the peaks to find some sort of stability and time spending around current levels. Sensex dipped from 21,000 to 9000 levels. It formed a low of around 7700 levels during October 2008 which continue to remain a crucial level to watch out for from the point of view of Technical Analysts. I expect calendar year 2009 to witness the lag effect of the current slowdown to be more pronounced in the earning reports of various companies for the next 2 quarters.
Usually, the effects of slowdown are felt with a bit of time lag. Similarly, with a plunge in inflation and interest rates, we may see some positive effect in next half of FY2009-10. Though, as mentioned in earlier part of this article, interest rates does not qualify alone as a measure to stimulate demand. It needs number of measures like monetary policies, fiscal policies, governmental expenditure towards infrastructure & lastly confidence among consumers to spend more and generate demand for the goods & services for stimulated growth.
Mind set of Investors and What next for the Markets?
We have witnessed a scorching bull run for the past 5 years. This Bull Run was an interrupted one with very little of time consolidation in between. No doubt we had minor corrections in between the period but index never spent enough time at specific levels for a prolonged period. We, in fact, witnessed rise of markets at a faster rate than economic growth in the country, which does occur in the last phase of the bull runs. But, now markets have taken a conscious break. The global spill over effect is one of the prop that aiding the market to take that much needed break.
Also, the mind-set of the market participants needed a correction. It was almost taken for granted that earning from stock markets is a very simple process. The stock markets had become a den of intense trading and speculation. Long-term investment had taken a back seat. It was like invest now and get 30% returns in the next 2 months. The situation has turned back to a cycle where pessimism has replaced over-exuberance. Traders are stuck with portfolios which are bleeding by more than 50%. Investors are now even willing to exit markets even if their costs are recovered. But, is that possible in short-term so soon?
Now, investors are coming back to debt investments with low risk and safety being the theme of their excess savings. Investors are flocking for schemes where they can net 8-12% of fixed and assures returns. The cycle has turned on its head.
The external environment is becoming increasingly uncertain and witty. Uncertainty has always been the flavour of the stock market's existence. Markets bet on future prospects of earnings of the companies. Most of the times, markets would have always factored in the present events. Stock Markets react when the future event does not pan out as they might have expected. Coming back to present scenario, valuations of equity stocks have come back to reasonable and sane levels. But, now the investor community is fraught with pessimism and low confidence. They have done exactly the opposite.
When they needed to remain cautious or exit the markets at higher market levels, they took an un-informed entry. And, now that valuations are sounder, investors want to remain away from stock markets. The same mistake that they did earlier of not-exiting markets at right time is being repeated now. People want to exit markets with every minor recovery. So, in short, even if there is any recovery, for some time… all rallies will be sold into, once their technical targets are met. This will be the case for some more time to come. Uncertainty will continue to be there for some more time and to that extent volatility in stock markets. There will be odd earnings disappointment in between the Quarterly results, which will further increase the volatility factor. Sooner or later, markets ought to find some ground of stability and bottom.
Fundamentals will take back its place of contention once there is some semblance of certainty in global markets. That will take time, as we are still in a global rot. Many people do not know whether this is bottom of global woes or is still to find ground. Different Analysts make different predictions due to uncertainty factor over the markets future course. Only time has the answer as to where we will settle and how soon can we settle down with peace. But, peace will cometh surely, sooner or later.
Just as I started this post with a phrase: ‘After every shining day, there is a night’… Similarly, after every night, comes a sun with a hope of a long rising day.
