- by Kuppusamy Chellamuthu
Investment guru Mark Faber some time back had observed that a 30% fall in the price of Indian equities was very much in the offering. Now he has advised investors to take holiday till October and relax. We have neither the experience nor the exposure to comment on his observation.
However what we can figure out is whether a 30% down is possible? What was believed to be a cynical view a month back, this now is a reality. BSE index had come down from as high as 12650 to 9100 levels, close to 30% in absolute terms. Do we expect some more downside movement? Well.. only an astrologer can tell.
Imagine a stock trading at 25 times of its TTM earning with anticipation of prosperous growth. Due to macro economic conditions and company’s performance, market can pretty much re-rate it 17 times levels. This is 32%.. when this particular stock, sector, country, equity as an asset class turn unfavorable for investors globally, even further loss is not ruled out.
After the market shrunk to 9500 levels, many experts came out openly saying that the real value of Sensex was around 7000 levels. Before commenting on their views, we have to see what happened to individual portfolios of small investors. Only a tiny percentage of long term investors managed to restrain their loss (even unrealized) within 30%. In many cases, the fall has been anywhere between 40% to 60%. A close analysis of most of the stocks would have revealed another fact. They now trade around the prices when sensex was around 6500. So.. in real sense, the impact of this crash is much more than what the index shows. Is Sensex not a true indicator of the entire market. Well.. the argument continues.
Now, we need to pay attention to these experts who claimed the true value being around 7000 levels. Did any one of these experts dare to pronounce this 6 weeks back? Accordingly these same people, the market was predicted to cross 15,000 before we cross 2006. Indian economy was strong and corporate performance was robust too. In just one month, concerns of inflation, government deficit and immaturity of our capital market are attributed now. Most of the times, it is hard to understand these statements, at least for me.