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Sat, 11th Oct 2008  New Delhi: The US financial crisis is triggering fears of a recession worldwide. Fears over the impact of the crisis on the Indian economy escalated on Friday with heavy losses at the stock markets. CNN-IBN's Stocks Editor, Udayan Mukherjee gave his analysis saying that it was the worst week ever on the markets, saying that the market down 15 per cent was as bad as it gets. Read on for his expert analysis.
BLOODBATH
It was not one of the worst weeks – it was the worst week ever. The market down 15 per cent is as bad as it gets. It is completely unprecedented and unexpected. One does not expect to see largecap names lose 25-30 per cent of their market cap in just one trading session flat. That's exactly what has happened on Friday and there are lots of reasons and lots of things which have happened in the market. From Infosys, to the cash reserve ratio (CRR) cut, to the Index of Industrial Production (IIP) number, to the Finance Minister and the SEBI statements – it has been very eventful as a day.
But at the end to look at stocks like Reliance Communication down 23 per cent, ICICI Bank down 20 per cent, Reliance Infra down 20 per cent - stocks in the index giving up 1/5th or 1/4th of their market value in a single session, tells you what path sentiment has come at, at this point in time. So global panic, bad local macro numbers and nobody wants to buy – there are only sellers in the market – this is classic capitulation and a bear market in full flow.
It is tough to say whether the worst is over as the global markets haven't turned around yet. As long as the panic subsides here it is tough to take a call whether we will turn around the reform the bottom out here.
Despite intervention from the Central Bank, the markets did not close very well so it is very difficult to say whther a bottom has been formed. If you have had a 15 per cent fall on the Sensex, you can usually expect some sort of pull back. But that hasn't been coming for the last two-three days, so maybe there is more downside to come.
Even after that if we do get recovery, it may not be a sustained recovery because global and local sentiment is hurt considerably and there are not too many buyers in the market. There are more sellers. FIIs and HNIs are getting a marginal call and have been forced to liquidate many of their holdings. It is a difficult situatuion and the bear market is in full flow.
IIP NUMBERS
That number could be one-off but we have seen a fair number of poor IIP numbers over the last six-months. Some numbers have been okay, some have been pretty bad but the message is clear that things are slowing down quite substantially in the economy. There is no doubt about that and one would see repercussions of that not only in GDP growth but also in earnings growth – that is something which is worrying the market.
The 1.5 per cent number might or might not be an aberration, but a lot of people in the market and in the economy seem to be in denial mode as well. They refuse to take on board any poor economic number, just wishing it away as a bit of an aberration and focusing only on the good numbers which come in.
I think the message is quite clear even if you look at or tab the newsflow from the ground that things are slowing down quite substantially and we may end up with a macroeconomic backdrop which is not as favourable as people would have us believe.
That number hurt sentiment quite a bit and the market is quite convinced that things are indeed slowing down, this IIP number being an aberration not withstanding, which is why despite several protestations and clarifications from various sources, the market still closed down 7 per cent and I wouldn't be so sanguine that the market has not got it right.
ADVISE FOR RETAIL INVESTORS
I suppose retail investors would be panicking at this time. With the Sensex close to 10,000, it's difficult to take a big sell call because the markets have literally halved from its peak. Many stocks down more than 70-80 per cent. From these levels to exist is also a difficult decision. Should they buy, they should do so selectively with the expectation that the markets could head down in the next few days or weeks providing them with a better opportunity. If they are going to be angsty about the fact that if they buy and the stock falls another 10-15 per cent, then they should stay out as it is a very fluid situation.
It is possible that despite such carnage, the levels could fall down in the next few weeks, so maybe one should not buy aggressively. Selling will be difficult after the price damage which has happened already.
For investors probably it is too late to sell. We are less than half of the index level of January. I think if you haven't sold already you can hardly sell stocks that are down 80 per cent from their peak values. So, it is tough to sell at these prices. Is it easy to buy? Not quite yet. So, I think investors should probably sit on cash, and not sell in a panic. They should probably not do anything and just watch the situation unfold over the next few days.
ON CRR CUT
The Reserve Bank of India is doing the right things. First things first, it has to inject more liquidity. It will have to do more. So I wouldn’t be surprised if more CRR cuts come in the next fortnight I wouldn’t even be surprised if interest rate cuts also happen, though that it is not consensus expectation at this point in time. But as one has seen in the west, these things are not quite working. They need to be there. The market takes on board, accepts the large – which is being given and then just hammers stock prices down even more.
So while this is a help, it will ease liquidity in the system – may be cool call rates a little bit – but bankers have been on record saying that this will not ease lending rates in the system and banks might even choose to hold on this liquidity and not lend it out because of the kind of industrial growth situation they are witnessing. So it is not like this money will come into the system. It might just lie with banks who might want the cushion of extra liquidity at this point in time. Will it ease the margins situation which brokers and bankers are facing at this point? May be somewhat but even so I doubt whether this will have a hugely material impact on how things are progressing.
ON ICICI BANK
The market has such conviction in hammering a stock down so continuously despite all sorts of clarifications coming in. Look at the sequence of events. The management has clarified not once, not twice, but thrice. The RBI has clarified; the Finance Ministry has clarified that ICICI Bank does not face any kind of problems, and yet the stock falls at the rate of 20-25% a day, which tells you that the market probably knows something that we do not.
The market is a very clever beast. When clarifications are given and the market takes it on board, then there is no reason to fall like this. You can see that ICICI Bank probably does have a fairly reasonable liquidity position if not an utterly comfortable one. It doesn’t seem to be in any kind of problem that western banks seem to be in. Yet the stock price is falling.
I doubt whether this is any kind of concerted bear hammering or anything like that. My fear is that the market knows something that we are not aware of today, which might unfold over a period of time. I hope that the market has got it wrong. For the moment, we take the management’s clarification at face value, and it doesn’t appear that ICICI Bank has any kind of liquidity problem or is about to go belly-up or anything like that – far from it. But the screen makes you worry quite a bit about how things are progressing.  | 
