Prof. Jayanth R. Varma’s Financial Markets Blog

A blog on financial markets and their regulation

More on India being in September 2007

More on India being in September 2007

I received several comments on my post yesterday in which I argued
that India is now where the US was in September 2007. Several focused
on the large correction that has taken place in the equity markets and
argued that in this sense, much of the pain is over. I disagree. India
had a most outlandish bubble in the equity market and a partial
correction of this is not what I mean by pain. At this point, only
momentum investors in Indian equities are suffering; longer term buy
and hold investors are in the money.

Two reference dates that allow stock markets across the world to be
compared are the highs that most markets reached in early 2000 at the
height of the dot com bubble and the low points that many markets
reached after the 9/11 event in 2001.

  • The Sensex close of yesterday was over 70% above the dot com
    peak. In comparison, the Dow in September 2007 was 18.5% above its dot
    com peak while its close yesterday was 27% below that peak.
  • The Sensex close of yesterday was almost four times the post 9/11
    low. In comparison, the Dow in September 2007 was about 69% above its
    2001 low while its close yesterday was pretty close to this low (a
    mere 3.4% above it).

Let us for the moment put aside the possibility of the Sensex
returning to its post 9/11 low – that would be a drop of almost
75% from yesterday’s levels. But what about the Sensex returning
to its dot com highs (a 40% fall from yesterday’s level)? Is
that possible? Well if aggregate corporate earnings were to fall as
they well might in a recession and if the PE multiples were to shrink
in line with slower global growth opportunities, this is by no means
beyond the realm of possiblity.

India and China are essentially leveraged bets on the global
economy. When the global economy goes into recession, stock markets in
these two countries will fall much more than global markets just as
they rose much more than global markets on the way up.

Other commentators argue that India will not see much pain because
we did not have the wild excesses of the US. The UK has had very
little of the teaser rate mortgages and other such toxic stuff that we
talk about in the US context, but the picture that the Governor of the
Bank of England painted in his speech
earlier this week was quite dismal. And did we not have excesses in
India? Did we not reach a point last year where many companies found
that it was cheaper to hire a senior manager in the US than in India,
that it was cheaper to rent office space almost anywhere in the world
than in India?

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