Prof. Jayanth R. Varma's Financial Markets Blog

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Prof. Jayanth R. Varma's Financial Markets Blog, A Blog on Financial Markets and Their Regulation

© Prof. Jayanth R. Varma
jrvarma@iima.ac.in

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Thu, 23 Oct 2008

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.

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?

Posted at 15:43 on Thu, 23 Oct 2008     View/Post Comments (11)     permanent link