Sunday, January 22, 2012

>Stock Market 2011 v/s 2008 Many similarities, but a few differences too and its impact

2011 witnessed the second biggest fall in Indian markets (25%) after 2008, when markets fell 52%. We draw several interesting observations from a comparison of the years, 2008 and 2011. There are several similarities and also a few differences in key elements related to both, stock markets and the macro economy.

2011 v/s 2008 for economy: Slower downturn; sharp recovery unlikely
We compare 2011 macroeconomic situation with that of 2008 on 5 elements: Growth, Inflation & rates, Credit & liquidity, Fiscal scene and External situation. Essentially, 2008 was a period of a sharp economic downturn followed by an equally sharp recovery. In contrast, 2011 has been a slower downhill but signs of firm recovery yet to emerge. Interestingly, in 2008, we had both fiscal and monetary tools available to stimulate revival. Currently, however, we have only one – monetary tool to stimulate growth.

Element #1 Growth slowdown: Sharp then, more gradual now
Real sector indicators including GDP and IIP growth was on a downhill on both the occasions although the fall was sharper in the post-Lehman period.

Element #2 Inflation & rates: Yet to ease, unlike then

  • In 2008, inflation had risen quickly in the pre-Lehman period followed by a collapse towards the year-end. In 2011, inflation stayed higher through out the year and is showing some signs of easing only in Nov-Dec.
  • Repo rate saw a cycle in 2008, while in 2011, they have on risen so far. Yield curve is very flat in 2011 unlike 2008.

Element #3 Credit & liquidity: Still tight, unlike then
  • Bank credit growth was on an upswing pre-Lehman and collapsed subsequently. In 2011, bank credit gradually and continually slowed down.
  • Liquidity was moderately stressful followed by significant easing in CY08. In contrast, through out CY11 liquidity has been under severe stress with no signs of easing so far.

Element #4 Fiscal scene: No headroom for stimulus this time
  • Fiscal consolidation in 2008 left significant headroom for fiscal stimulus to counter slowdown impact of global crisis. But, unlike in 2008, there is no fiscal flexibility now.
  • While G-Sec yields were rising in both 2008 and 2011, higher deficit and stressed liquidity ensured that yields are currently at much higher levels than 2008.

Element #5 External sector: Trade worse, reserves better
  • In both CY08 and CY11 exports slowed down. However, deficit came down in the later half of CY08 as trade itself shrank and rupee depreciation helped restore trade balance.
  • Current account deficit worsened and forex reserves depleted in CY08. Early signs of the same are visible in CY11 too.
  •  Indian rupee depreciated by 19% vs USD in 2011; in 2008, the depreciation was 24%.

To read full report: INVESTMENT STRATEGY