After the crash of August 24, 2015, when the Sensex plunged by a record 5.94 per cent, or 1,625 points, people started to draw a comparison with the Global Financial crisis of 2008 that shook the stock markets worldwide.
It was the month of January in 2008 when domestic benchmark indices were at their peaks. However, concerns over slowdown in the United States impacted global equity markets, pushing them down steeply from their highs. As a result, the BSE Sensex fell from 20,873.33 on January 8, 2008 to 8,160.40 on March 9, 2009. This was a fall of 61 per cent in nearly 15 months.
In the current calendar year(2015), the benchmark indices once again hit their new closing highs in January on hopes that Narendra Modi government will revive the macro economic environment. However, delay in key reforms like the Goods and Services Tax and Land Acquisition bills coupled with China slowdown dented market mood this year. As a result, Sensex declined 13 per cent to 25,822.99 on September 23 from 29,681.77 on January 29 this year.
Nilesh Shetty, associate fund manager, equity, Quantum AMC, said, “Correction of 2008 surprised investors as they were not expecting a fall of over 50 per cent in the domestic markets. Slowdown in US housing market was the main reason for the fall then. The scenario is different this time. This year markets hit new highs on account of change in political leadership. However, things remained the same at ground level. Meanwhile, investors started checking valuations of domestic markets and found it was on higher side as compared to other emerging markets. I believe these factors dampened market sentiments this year.”
Brokerages have downgraded their Sensex targets for this year but still bullish on the further movement. CLSA has lowered its forecast for December 2015 to 30,000 points from 31,800. Ambit Capital too has revised the BSE Sensex target to 28,000 from 32,000. Macquarie and Barclays have downgraded the December target for Nifty to 8,700 and 9,642 from 9,600 and 10,219 earlier. Deutsche Bank also has cut India’s BSE benchmark Sensex target to 28,000 from 31,000 earlier citing concerns over global growth.
Below are few five factors that compare the bears of 2008 and 2015:
Commodity prices: 2008 was an era when commodity prices were all going upwards. Particularly that of crude oil with prices in excess of $100 per barrel. However in 2015, commodity prices are soft. This in turn has and will continue to help India as an economy as we are primarily importers. Soft commodity prices also help corporate earnings through margin expansion. In addition to this, “The global softness in commodity prices also helps improve India’s image for foreign investors as compared to other emerging markets since most emerging markets are commodity exporters and have in turn seen their own growth come under pressure in recent times,” said Nitasha Shankar, vice-president, research, YES Securities.
Inflation: Back in 2008, inflation was a big concern for all markets including India with CPI trending in excess of 8 per cent. Higher levels of inflation eventually led to monetary tightening by the central bank. This time around, inflation has been surprising on the positive which has left room for monetary easing. This in turn is expected to help revive investments and capex in the country and drive economic growth.
China: In 2008, China was considered to be the main growth engine in the global scenario. However in 2015, China has emerged as a major investment concern with signs of a significant slowdown in its economy. This fear was further intensified when the People’s Bank of China devalued the currency, Yuan. This in turn has triggered fears of a currency crisis particularly in the emerging market currencies. While the Indian Rupee did follow suit post devaluation of Yuan. However “The Rupee is relatively in a better position thanks to the war chest of foreign exchange reserves built up by the RBI over the past 1-1.5 years,” said Shankar.
US: In 2008, the US economy slipped into recession, which in turn had a spillover effect in the rest of the world. The consecutive rounds of quantitative easing led to a huge flow of money and liquidity in the global markets which in turn led to a sharp increase in asset prices particularly in the emerging markets. “This time around, US appears to be on a relatively better footing as the economy is seeing green shoots of recovery. This in turn has led to a drawdown of the quantitative easing programs and have also triggered the expectation of monetary tightening in the economy,” said Shankar.
Valuations: On January 8, 2008, Sensex was trading at price-to-earnings (P/E) ratio of 28.51 against five year average P/E ratio 18.23, which indicates the benchmark index was highly over valued that time. However, the scenario is different presently. On January 29, 2015, P/E ratio of Sensex was at 20.13 against five year P/E ratio of 18.70. This time too valuations were on higher side but not that much that were in the bear market 2008.