Don't expect quick recovery in the indian equity market.

Don't expect a quick recovery. That's the conclusion from our '8-year' equity cycle model. To support the model's conclusion are weakening fundamental and economic factors, which suggest that a quick recovery in the Indian equity market is a far dream. The equity cycle though is a lead indicator that digs into past data and throws a likely trend. Having depicted a crash in 2008 post Sensex peaking at around 22k levels, the model now shows some pain before consolidation. For a small retail investor, it's a boon. Such investors can now get the opportunity to accumulate at regular intervals for the next boom in the Indian equity market.



History: The 8th Year Itch phenomenon

There was reasoning for every irrational behaviour. No wonder a model that showcased a sharp correction was completely ignored. Also, there were just three cycles before 2008 (for which data was computed) and data was marked by home grown scams. That could have put off some investors. What was however ignored was the fact that these three 40% plus corrections occurred over 28 years (though, Sensex was officially launched in 1986, it has a base of 1978/79 and is back computed). These data points appeared strong enough to base a theory and confidence sparked from the fact that trend lines were replicated every eighth year, though the band inched higher every cycle. So, in all probability, the correction had to happen.



The 40% Plus Corrections

1984 - Riots, Assassination, Bhopal Gas Tragedy, Economic Crisis

1992 - Harshad Mehta Scam

2000 - Ketan Parekh Scam/Dot com bubble bust

2008 - Sub prime meltdown



And then, one fine day in January 2008, it all came raining down. Sensex tanked and within a few trading sessions lost over 25%. Since then a lot has changed, fundamentals have deteriorated and economic events worsened. The Sensex is struggling to regain lost glory. If the cycle is to be believed, the recovery may not happen as yet. There's still some pain left.



The First Hit

Year 1984 1992 2000 2008
Sensex High 410 4467 5934 21207
Sensex Low 242 2476 3590 14809
Decline -41% -45% -40% -30%
Time 8mths 8mths 3mths

Note: Sensex Level on closing basis. Decline may be higher if calculations are based on intra-day high/low of Sensex



Recovery from the Lowest Point during the Correction Cycle

Year 1984 1992 2000 2008 High 410 4467 5934 20873
Lowest point NA 2084 2617 14809
Decline NA -53% -56% -30%
Time to Lowest Point NA 12mths 19mths
Recovery to Old Top 27mths 46mths


Note: Sensex Level on closing basis. Decline may be higher if calculations are based on intra-day high/low of Sensex



As evident from above, the corrections in every cycle were steep and fast. This was followed by a long cooling period, which could be 15-25 months. Once the base is built, the benchmark index swiftly moved up to achieve the earlier top that takes 27-46 months. At these levels, bouts of profit booking occurred from investors who believed a healthy correction was needed for markets to smoothly sail ahead. Eventually the underlying momentum on the back of strong fundamentals came into play and the index zoomed ahead to make newer highs.



The Current Phase

The 2008 cycle, in all probabilities, is the latest cycle. The benchmark index has corrected 30% odd and has witnessed some bounce back. If the cycle is to be believed, we may see some more pain in the offing - 10% or more.



The bounce back lacks strength. If you observe the chart below closely you would see that once the correction started, the Sensex has made lower tops and lower bottoms. These are signs of weakness in the equity market.



Weakness in the current equity market is evident - oil issues, MTM losses, inflation concerns, fiscal deficits, and US subprime concerns among others. There is no escaping to this fact. The market knows all these and seems to have been factored such events.. FIIs have already pumped out $5.6bn out of India and are reducing India Inc. ownership.



The other element one could consider is the US Presidential cycle. According to the theory, the US equity market bottoms out 1.8 years into the Presidential term. And recently we have seen that Indian equity market is not decoupled with the US market.

The Future
India's long term infra led growth story stays. However, we need to go through the current pain in order to witness the new Bull Run. As of now, Sensex EPS is expected to slow down. A 10-15% range would take Sensex EPS to Rs 950 valuing the market at 17 times FY09 earnings. Looking at the current market conditions, it appears expensive


MANISH BANSAL
MBA(FINANCE)

Indian are the not responsible for the high commodity prices

Recently American President George Bush blamed emerging economies like India and China for rising commodity prices around the world. I would say American are itself are the reason for the high food prices around the world. Americans are the largest consumer of meat around the world it is estimated that an average american eat 125kg of meat every year, and if we total figure comes to 35,000,000 tonnes meat every year. An average Chinese eat 70kg meat every year. Thing I want to highligh here is that animals are poor converter of energy for e.g. a cow takes 16kg of food grains to convert 1kg of meat and over 70% of the foodgrains produced in America is consumed by the cows and pigs for producing meat.

Meat is also an inefficient energy provider. would you believe that a beef eater needs more energy walking 1 kilometre than a car. and example would prove this point. The beef eater would spend 70kcal in wlaking 1 km . letus say he gets this energy back by eating a piece of beef containing 70 kcal. The beef-cow would have eaten foodgrains contining 1120 kcal to produce this piece of beef. The meat supply chain further necessiate chilled storage during transportation,warehousing, retainling and at beef-eater's domestic refrigerator tatalling 2240kcal. what quantiy of petrol would contain 2240 kcal. ? 70ml of petrol! And a car would go more that 1km.

Present Indian consumption is 3kg percaptia per year and all indian put together consume 3million tonnes of meat every year. presently indian cow feed on grass and pigs on garbage. Imaging if 70% of Indian foodgrains go feeding animals producing meat.

we Can't forget water, 10,000 litres of water is needed to produce 1kg of beef. where is water to produce million tonnes of meat. There is also a problem of disposing million tonnes of animal waste. So picture is clear in front is who is causing or reason for global food prices. why to blame ethanol?