The index's downslide has not happened overnight. The Sensex has been falling consistently over the last few weeks, shaving off a significant amount of investors' wealth. In the last six weeks, the Sensex has gone down 21 per cent from its May 2008 level, when it was perched well above 17000.
Most of this slide, say analysts, has been because of the spiralling prices of crude, though India's double-digit inflation and resultant price rise have also contributed to it. Says Sanjay Aggarwal, head of financial services, KPMG: "The fundamental cause of this is the lack of stability in oil prices. Compared to the demand, the increase in prices has been disproportionate." On July 3, oil prices crossed the $145 per barrel mark. As crude oil prices breached higher levels, the impact was felt on indices across the globe. While the Sensex took a significant hit, its tremors jolted others like Dow and Shanghai too.
In India, there was considerable panic selling with foreign institutional investors (FIIs) adding to the negative sentiments by pulling out from the Indian markets. According to market estimates, FIIs have sold equities worth over Rs 18,000 crore in the last two months. Says Amar Ambani, VP, research, India Infoline: "FIIs are constantly selling in emerging markets and India, which were high-growth stories with low inflation. In the last few months, all these, including India, have witnessed double-digit inflation. Even domestic institutions, who have money, are not buying."
Capital market analysts are pessimistic about the current state. Says Arun Kejriwal, founder, Kejriwal Research and Investment Services: "Compared to the time when people were looking at 20000-25000 levels, we are now in the exact opposite state. The euphoria has gone."
Today, nobody is even talking about there being a bottom. Three things—crude oil, inflation and elections—are making people believe that companies will stop making money. With inflation expected to remain an issue for the next 6-8 months and the price of crude not expected to come down, the situation looks grim in the short term.
For investors who have lost lakhs of rupees in the current meltdown, the light at the end of the tunnel might not be visible immediately. Says Ambani: "We are well into a bearish phase. Eventually, the market will slide further. Sensex at 12500 or 12000 is pretty much on the cards. There may be a few days of rallies but not enough to put it back to the level of 17000."
Amitabh Chakraborty, president (equity), Religare Securities, agrees. "The last bear market saw a 17-month range-bound market. We might see the same now—the market getting stuck in a trading range till such time as we re-establish equilibrium between valuations, growth and interest rates," he notes.
The question on everyone's mind is whether we have seen the bottom of the fall. Analysts are not very hopeful. Says Gaurav Dua, head of research, Sharekhan: "Until you see some signs of easing in crude oil prices, the markets will continue to be under pressure. Our advice is not to jump into the market." Cautioning investors to wait for the market to settle down before investing, Dua expects the market to bottom out at 12000 levels—plus minus 500 points.
Not everyone is so sure, just as the question mark remains on crude oil prices, which have more than doubled in the last one year. "Bottom hunting is virtually impossible in the current scenario. The only way to look at the market is to withstand volatility. If someone asks me, can the market go down another 10 per cent, my answer will be: yes, it can," states Puneet Nanda, chief investment officer, ICICI Prudential Life Insurance. Kejriwal, however, feels there is no conviction in the market, and as such the bottom could lie "somewhere between 12800-13200, barring any further political instability, in which case you can discount another 500 points."
All red: Investors, high-strung, at the BSE
Many analysts are, all the same, hopeful that all is not lost and there could be a silver lining in the horizon. Says Chakraborty: "Based on our Q1 2008-09 preview, it looks like numbers, although slowing down, are still decent, and no negative growth will be there...the actual test is in Q2 2008-09, where we will see the effect of high costs of borrowing and doing business playing out."
Referring to the last bear market between February 2000 and July '03, totalling 42 months, when the market fell until September '01 and remained in a trading zone thereafter, Chakraborty feels that even at present levels, the risk reward will be favourable to investors. Concurs Kejriwal: "Corporate India is at 12 multiples of the current year's earnings. So it is neither cheap nor expensive to invest at this level." Yet given the drop in the market, the global fund manager has a tendency to book profits.
The real estate sector has been one of the biggest losers as realty stocks, once considered lucrative, have been among the worst sufferers. Also, mutual funds, which have retail and company investments, have also taken a beating. This, experts say, has been because most mutual funds normally invest in the top 100 stocks, which have been at the receiving end of the current bear hammering.
So, where does the retail investor go? Says Vikram Kotak, chief investment officer, Birla Sun Life Insurance: "For the retail investor, this is a good time to buy. Those already in the market should stay invested for a 2-3 year time horizon and not try to time the market." However, analysts feel that investing in debt or fixed deposits is not a good idea for the medium to long term as yields are less than inflation. Adds Aggarwal: "In an inflationary scenario, retail investors invest in gold, real estate or the capital markets. Since gold prices are already very high and real estate is yet to come down for the retail investor to get in, capital market is still the best area."
One thing is sure. All those investors who felt cheated at having missed the spiralling growth earlier can now take a chance to buy stocks which might have seemed out of reach and at that time wait it out for the next rally.
Arindam Mukherjee And Arti Sharma