1. Indian stock market headed for 2008-like crash? 6 warning signs you must not ignore anymore

Indian stock market headed for 2008-like crash? 6 warning signs you must not ignore anymore

Despite a stellar show in 2017, India's stock market might be on the verge of a major correction, which might be as bad as the 2008 financial crisis. We take a look at five warning signals which tell India’s stock market may be close to a 2008-like crash.

By: | Published: October 23, 2017 3:24 PM
Bombay Stock Exchange building. (Image: Wikimedia Commons)

Indian stock markets are on a sustained rally this year and have gained strong since January right after the plunge of November-December, following demonetisation. Benchmark equity indices Sensex and Nifty have risen 22%-24% so far in this year, widely outperforming other major stock markets in the world. Domestic markets have also seen a few milestones this year, including Nifty crossing the five digit mark of 10,000 and Sensex nearing 32,700 points for the first time.

Despite this stellar show in Indian equities, the stock market might be on the verge of a major correction, which might be as bad as the 2008 financial crisis. In the year 2008, the 30-share barometer Sensex plunged 27% over the month of September to 9,748.08 points from 13,417.91 points. Later in a six-month period from March to September 2009, the Sensex more than doubled to 16,741 points from a level of around 8,325 points. We take a look at five warning signals which tell India’s stock market may be close to a 2008-like crash.

Stagnant earnings trail market surge

Earnings growth have languished in the last three years but the markets and stock prices have continuously risen. Earnings per share at companies in the NSE Nifty 50 Index have stagnated since the run-up to the 2014 elections, which triggered a surge in equity prices, Bloomberg said in a report last week, adding that the index has risen 50% over the same period.

The risk is that projections have been too optimistic. Earnings at NSE Nifty 50 Index constituents have trailed consensus forecasts for most of this decade, the Bloomberg report said. “It is a liquidity-driven rally, and there might be a hard landing, especially if the second quarter earnings disappoint, Yogesh Nagaonkar Fund Manager – PMS, Bonanza Portfolio Ltd told FE Online.

Liquidity-fuelled rally

Fund managers say that the markets are rallying simply because of their being too much liquidity in the system without the underlying fundamental factors to support it. “Equity Mutual Funds are at over 6% cash holding now, which is high. A lot of foreign investors have already exited the market,” Yogesh Nagaonkar said. “It’s a typical bull market and there is huge liquidity with a lot of money flowing into Mutual Funds,” he said, adding, “Now, when the mutual funds start selling, markets will crash, as there will be no one to buy.” One other investor chose not to mince words. “Markets are heating like a tinderbox, complacency is at the highest level you will see,” Sanjiv Bhasin, Executive Vice President at IIFL said in the last week’s Bloomberg report. “This is the time to start smelling the coffee,” he added. 

IPO bubble

This year has emerged as a record-breaking one for the IPO (initial public offerings) market. About Rs 50,000 crore has been raised through the public offers so far since January 2017, and several others are slated to come up with their public issues. Nine years ago, 2008 was the year that, many hoped, was going to be the year of mega IPOs. The stock markets were rallying to new highs, and Reliance Power‘s IPO was oversubscribed 73 times. But, the company’s shares slipped on the listing on 11 February 2008, and so did the Sensex by 834 points.

This year is also being touted as the year of IPOs. Some have even entered the exclusive club of the companies mobilising over Rs 1 lakh crore and several issues have been oversubscribed by more than 100 times, even at higher valuations. The reason: High liquidity in the market, perhaps, due to demonetisation. “A lot of IPOs are being sold at crazy valuations, with a lot of exuberance. It’s not sustainable,” Yogesh Nagaonkar said.

Irrational movement

Indian equities have been rallying since January 2017 even as economic growth has slumped to its weakest since the year 2014 and most companies reported lower-than-expected first quarter earnings. Despite the earnings decay, the Nifty’s estimated price-earnings ratio is almost two standard deviations above the 10-year mean, another recent Bloomberg report said. This means the valuation of Nifty measured in terms of price-earnings ratio is exceptionally higher than its 10-year long-term average. The last time the ratio was that high, at the start of the global financial crisis in 2008, the gauge had its worst annual decline on record.

GDP under stress

India’s GDP growth plunged to a three-year low in April-June, slowing down to 5.7% in first quarter of FY 2017-18 and disappointing for the second straight quarter. The 5.7% fiscal first-quarter GDP growth, of an economy desperately trying to recover from the shocking impact of demonetisation, was much lower than the 7.9% seen in the same quarter a year ago. It even slowed down from 6.1% in the preceding quarter.

Brokerages warning!

Brokerages have been expressing caution over Indian market that it is overvalued and is trading at close to 20 times one-year forward earnings, well above its long-term historical valuations of around 15 times. “There is a clear and present risk to the earnings turnaround in FY19 as consumption, which has been the sole driver of growth, will not likely be strong enough due to weak fiscal push and job growth. The capex cycle remains nascent and limited to pockets of infrastructure,” Macquarie said in a report in September 2017.

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  1. Ajit Gholap
    Apr 6, 2018 at 12:07 pm
    Of late, why are you not publishing stock market prices? Pls. reply soon. Ajit Gholap
    1. V
      Oct 25, 2017 at 4:08 pm
      Wrong analysis. One should look at 2004 when sensex went from 3000 to 6000 within a couple of years - when company earnings were stagnant. Bimal Jalan reduced rates from 10 to 6 just prior. Banks were recapitalised, bad loans were restructured. Sound familiar? I thought market had doubled and sold at 6000 thinking market was overvalued - only to reenter at 10,000 because of earnings growth. Right now India has been in a recession from 2008 to 2017. Chances of further recession after 19 years of recession already - and markets at 30,000 just 50 up from 2008 level of 20,000 are so so sooooo remote
      1. C
        Oct 25, 2017 at 1:31 pm
        GDP has now become a Gross Domestic Problem
        1. V
          Vikramsimh S Mandlik
          Oct 25, 2017 at 10:24 am
          The economy is heading towards recession. New job creations have been nearly stopped. ry in medium and small scale industry are at lowest. Besides works have been carried out on contract basis still resulting in in low remuneration. On the other hand government had given 7th pay and hiked ry if government employees by 25 . Actually there was no need to hike government employees' ry. In 2006 private sector especially in IT industry ry was much higher than government employees. Now reverse is the case. Demand cannot grow by simply increasing ry of government employees. Effect of 7th pay is that workets in private sector and small self employed persons are tempted to buy looking at the incresef living standard of government employees. These people are buying commodities on EMI.So NBFCs have grown veryfast these days. People may not repay the loans and NBFCs will be in crisis after a year or so. Then there will be a certain recession. Market will collapse soon.
          1. B
            Bimal deep
            Oct 25, 2017 at 3:52 am
            I as a novice could feel that d markets were heated up .d nifty index has reached an unnatural high .when all economic parameters are down ,how can d markets race like this ? Yes ,d iPo s also collected money without any basis .some valuations were crazy .d mets can crash ,when? Let's watch
            1. V
              Vikramsimh S Mandlik
              Oct 25, 2017 at 3:37 pm
            2. P
              PREM NARAYAN NATH
              Oct 24, 2017 at 8:48 pm
              Contrasting and contradictory views of the various stakeholders may point towards a crash as well as surge of points. Common investors , who are experienced, may use their intuition pragmatically. But the question is still unanswered: Even day to day predictions on the issue of surge or crash given by brokerage houses are not similar or uniform. Many men, many minds. Better to take resort to traditional banking channels.
              1. D
                Dr S Teckchandani
                Oct 24, 2017 at 11:11 am
                2 extremes views seen , one nifty will crash and other it will touch 12000 by year end, both have their figures to push their views. In such a situation for a lay person the best approach would be to invest in hybrid funds as this would safe guard their interest if market crashes and at the same time give them some appreciation if the marke goes up.
                1. Narayan Dass
                  Oct 24, 2017 at 5:58 am
                  I fully agree with the above article. This is the 6th quarter when our GDP Growth has come down to 5.7 per cent. Businesses are down because GST is implemented without any preparedness/homework. Unemployment is on rise. Ruling party image is down as we have seen from the outcome of Gurdaspur Lok Sabha by-election. There was a time when Indian Stock Market was driven by common investors. Afterwards, FII had taken over. In last few months, DII have taken this charge from FII. It is not over yet. It seems that now-a-days, some resourceful/influential individual(s) is/are in the command. Current rally is purely liquidity driven rally. There are no fundamentals behind it considering low GDP Growth, Rising Inflation Unemployment, Unfavorable Business Env., High Share Valuation,Companies' Week quarterly results and so on. IF WE GO AS PER FUNDAMENTAL, PRESENT NIFTY INDEX SHOULD BE AROUND 5000-6000. CURR. NIFTY INDEX AT 10184.85 IS BASED ONLY ON THE OXYGEN SUPPLIED BY DIIs AND FEW ...
                  1. P
                    Prakash kumar Agarwala
                    Oct 23, 2017 at 9:32 pm
                    I am estimate that one correction required be healthy for market also those people who are coming on sip are best average for their future profit.
                    1. P
                      P.K. Roy
                      Oct 23, 2017 at 7:45 pm
                      Market is already showing signs of strain of late.
                      1. S
                        SITARAM PONUGOTI
                        Oct 23, 2017 at 6:53 pm
                        Analasys is beleavable
                        1. Ganesh Kamat
                          Oct 23, 2017 at 6:45 pm
                          Good Simple GST. Middle class can contribute 90 of Tax collection Happily !! How? 1 country 1 Tax 1 Bank Transaction Tax, For first Rs. 5 Cr Turnover to ALL For Cash: Pay Rs.10- Tax, for every Rs. 1,000- Received, by mobile to RBI daily. Earn more, Pay more Tax, No Tax Return, only Record Create Employment. Govt may Stop Thief- Police Game try for more Tax Collections by simple way, for Peace, Prosperity Power. Forward if agreed.
                          1. M
                            Madarchod editor
                            Oct 23, 2017 at 6:00 pm
                            Did PC tell you?That bhadwa had let his corrupt Italian leader and his son to loot the nation.His should be cut and thrown in the gutter.
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