Crash, boom, bang!

It has been a while since I posted. Just like our stock market, I crashed! The reason being the market itself. I spent few days finding out the possible reasons and how worse it could get and guess what, I am still as optimistic as ever.

The sensex is down more than 5000 points compared to the highest level it attained towards the end of 2007. Evidently it is a big blow to the traders, investors, funds, IPO’s and most of all to the tempo in the country. The Finance Minister has been trying hard to keep the optimism levels from going down far too much by assuring that our growth rate for the coming FY08-09 is posed at a very promising rate of 8.75% (There has been many statements with a different rate each time, but this one seems to be the final projection).

Now, what really happened?
Recession in the US which is caused by words declared as used the most number of times last year – “subprime crisis”, lies at the root of the problems. In simple terms, ‘subprime’ means loan given to a person who is not eligible for it, because of his low creditworthiness, income or any other unhealthy financial situation. Ironically these loans are given to the same person at a rate higher than the market(reasoning- risk involved). Since US real estate valuations were blown out of proportion and were simply not affordable by subprimes, there developed a crisis. This in turn created lot of pressure in the banking industry that indulged in a lot of subprime borrowing and did not have enough funds to lend to businesses and other consumers who needed them for growth. So slowly the economy began to dip and then crashed. Businesses didnt do well and large number of employees were laid off. Incomes and consumer demand fell and since many countries in the world depend a lot upon the US, exports being the main share of their GDP, those economies also crashed. India was among the least affected as our exports to the US are comparatively less.

There is a reason why our stock market took some time to take the hit. Towards the end of 07, there was a lot of optimism in the our market due to large purchases by institutional buyers, foreign investors, excellent performances by some large cap and mid cap companies, promises and prospects reflected by the Government and a lot of hype. This lead to an illogical overvaluation of stock prices; illogical because they were high not as a result of the company doing well but as a result of speculation. It was like a bubble that had to burst at some point in time. After the Subprime, lot of American investors started pulling away their investments from other countries. This, in hand with the rising oil prices and blow to the software industry, in terms of declining projects, employee lay off and rupee value appreciation paved way to a much needed correction.

This is more or less like a world correction and a lot of people including me are still optimistic because our nation has all eyes focussed on development and stability. This is an opportunity to buy shares of promising companies.
Corrections like these are just nature’s way of telling us not to get carried away but to focus and do things the right way!

(to read more about subprime crisis check http://en.wikipedia.org/wiki/Subprime_Crisis )

 

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5 thoughts on “Crash, boom, bang!

  1. Thanks a lot for the view, simplified.

    But I have a few amateur doubts.

    1.
    Why did the FIIs invest so heavily in India towards the end of 2006 till the mid of 2007. The market grew exponentially. But the companies who contribute the market were having only a steady growth.
    What made FIIs invest during that time?

    2.
    Towards End-2007
    Pulling back money from the market, the market dipped heavily. But the companies were not performing badly at all.
    If FIIs intention was to use the long-term benefit which India can, why did they load and off-load so much money without any company-led triggers (in such a short span).

    and….
    1. how can the FIIs speculate things which typical investors cannot.
    2. When they speculate, and act accordingly, isnt that by itself, realizing the speculation (because the stocks they buy automatically increases its value)

    Quantitatively, how much percentage do you think “sub-prime” crisis would have contributed to Indias Market fluctuation “directly”.

    Kindly be free to correct me if my views are contradicting..

    Thanks a lot for blogging things “simple and straight-forward.”

  2. Nice cryptic way of presenting the much-talked about crisis which has touched not only the US but the worl economies at large.
    The stock market crash in India wasthere to happen all these days. It was only a correction,I guess.

  3. Rahul,
    Thanks a lot for your questions, becuase I did a lot of reading in my attempt to get the right answers. (i guess they are)
    Your questions and my answers inline –

    1) Why did the FIIs invest so heavily in India towards the end of 2006 till the mid of 2007?

    A) FIIs have been investing in india since the 90s. But, the growth story of India Inc (as it is called lately) became popular worldwide since around 2005. Our growth rates increased, inflation was low, interest rates were reduced, currency values were ideal, companies showed more growth prospects and stability, some international mergers and acquisitions were happening, lot of IPOs from promising companies like reliance, icici, dlf etc came up and (i use this word a lot), optimism started building up. Compared to many other asian markets, India looked like a brighter prospect and FIIs started pouring in in larger numbers.

    2) end of 2007 – If FIIs intention was to use the long-term benefit which India can, why did they load and off-load so much money without any company-led triggers (in such a short span).

    A) pulling off by FIIs (or selling) can be attributed to some reasons like
    – volatility in the markets due to the US story, Rs appreciation, software companies not doing well, lay offs, unattractive Q3 results
    – some FIIs may be operating on a short term basis, ie to maximise the earnings for their investors in the short term, so they might go to other attractive markets. it seems russia and ukraine are also pretty attractive now
    -there was a news that the govt is deciding to moderate FII inflows

    3. how can the FIIs speculate things which typical investors cannot.

    A) FIIs trade in large figures, millions unlike retail investors. OF course, there are DIIs like insurance companies/MFs etc who buy in large numbers but they dont completely match the FIIs.

    4. When they speculate, and act accordingly, isnt that by itself, realizing the speculation (because the stocks they buy automatically increases its value)

    A) i didnt totally understand this question 😦 but from what i make out i think they do that to maximise returns in the short term.

    5) Quantitatively, how much percentage do you think “sub-prime” crisis would have contributed to Indias Market fluctuation “directly”.

    A) I cant make out exact figures but i can say that it is the subprime crisis that has primarily affected the market fluctuation.

    For the past few months valuations of companies have sky rocketed. Every company has an ideal PE ratio, but recently these have increaased to a very high level because of all the hype/FII inflows.
    This is not a reflection of the true growth of the company and now that is being corrected due to the crash.
    Do read more about the PE ratio funda. chk wikipedia.

    Did i make sense ?

  4. gosh. You have answerer them way beyond my expectation.
    I have read about these in magazines but due to the market jargon they typically use. I was not able to understand.
    Now i should probably do my home work and study the basics.

    Your answer was really helpful.

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