V Pattabhi Ram and Pavan N Rao
“Rs Four lakh crore of wealth wiped out in two days flat”, remarked Rinku opening the discussion at the weekend hangout. “What?” screamed Wafers. “Do you know how many zeroes are in that number?” Rinku took the challenge. “A lakh has five zeroes. A crore is 100 lakhs and has therefore seven zeroes. So four lakh crore has five plus seven 12 zeroes.”
“What a calamity”, sympathised China. “You mean my arithmetic or the stock market tumble” asked Rinku. Even Wafers smiled. China ignored the joke. “It may take years for the economy to recover. This can severely hamper the growth of the economy, right?” he said looking around for approval. “Paper money earned, paper money lost” commented Wafers. “How can you be so callous”, demanded China. “It is hell a lot of wealth”. Rinku added. “But it is only market capitalization.” China was stumped. And asked, “What?” Wafers, the CA intern chirped, “You get market capitalization by multiplying the number the number of shares outstanding of a company with its market price.”
China was uncharacteristically irritated. “I know that. I was only trying to point out that loss of market capitalization is important. We can’t say it is only (repeat only) market capitalization. For, it represents the wealth of the shareholders”. Wafers wanted to know as to who had lost in the tumble. Was it those who had bought at a higher price? China remarked, “Not really, i.e. until they book their losses. Actually if they are long term investors they can wait and recoup the losses. At present the loss is on paper only. The stock market is not a zero sum game.”
Wafers wanted someone to explain the market happenings. Rinku took up the gauntlet. “Well, this fall is historic. In less than a week the Sensex has shed about 10%. And the fall on Thursday was the largest in terms of absolute Sensex points.” Wafers remembered a fall exactly two years ago when on May 17th 2004, the Sensex seemed to be falling into a bottomless pit. “Titanic collapses are caused by some fundamental reason, right? The fall in 2004 was because the markets perceived that a Left-backed Government would get off the reforms process, right ?” asked Wafers.
Rinku lectured, “Stock markets move on news, sentiments and perceptions. In 2004, sentiment and imagined threats to the economy caused the meltdown. The reasons that are being ascribed for the latest tumble include declining prices in the metals market, worries on rising US interest rates and the influence of global stock markets apart of-course from profit-booking. The Foreign Institutional Investors (FIIs) are said to have been net sellers during the mayhem.”
“That must have been the issue that Finance Minister was clarifying about FIIs” remarked China, recalling what he had watched on television. “Oh No!” said Rinku. “The FM was only clarifying that FIIs will be assessed to Income tax only as investors and not as traders. A trader pays tax at higher rates, you see. So, the markets feared an FII pullout.”
Wafers said, “I understand that in October 1987 when Wall Street crashed they called it Black Monday. Now they are calling this Black Thursday. Why can’t they call it Red Thursday; after all when stock prices fall, the quotes are written in red.” China and Rinku were left wondering whether Wafers was asking a genuine question or whether she had just cracked the joke of the year.
“The markets are sure to come out of this mess” said China. “Yes, it is a great buying opportunity”, remarked Rinku. China said, “The Indian growth story is far from over. In fact, India is considered more attractive than even China”. And then protested, “So why did the FIIs pull out ?” Rinku and Wafers couldn’t help chuckle. It was not often that China rated India over China. In fact, being a China-phile had earned him his nickname.
Rinku answered, “No one disputes the Indian growth story. No one disputes that India is one of the most happening economies in the world. But, China, investment decisions are a question of valuation. The Sensex has nearly tripled in under two years. That’s a return of 200% in two years flat or approximately 100% per annum. Its too good to last.” Wafers had heard someone remark that a global investment guru had pointed out that the Indian market is a 9500 market; implying that there was still some distance for prices to fall. Indian stocks were hot and overvalued. “Maybe this amalgam of interest rate/metal market worries and global tumbles was the excuse that an inevitable ‘correction’ that investors were looking for” remaked Rinku.”
“This slump also signals the integration of Indian markets with the world markets” said Wafers. After all, global markets too had crashed. She remembered what someone had once told her about what happened when the Gulf War broke in 1991. When that happened every portfolio manager worth his name had advised investors to sell off their holdings and sit on cash because war would lead to a market crash. In a sense they were right. Every market index Hang Sang, FTSE, Dow Jones, Nikkei crashed. But in India, the Sensex, actually climbed. In fact it was the beginning of the 15 month bull ride that culminated in April 1992. It had made an analyst comment that India was the only country that was celebrating the Gulf War.
How times have changed! Some good lessons amidst the Tsunami.