Will equities do as well in 2008 as they did in 2007? Will we see a continuation of the main trends of 2007? Or will the credit crisis in the West derail the bull market? It’s that time of the year when we all make predictions, never mind that nobody saw the subprime crisis coming last year.
Two markets of 2007
In fact, 2007 can be neatly divided into pre- and post-subprime. Between 1 January and 24 July 2007, the MSCI World Index rose by 9.4%. Between 24 July and 28 December, it fell by 1.7%. Emerging markets too saw a slowdown in returns post-subprime, but things were not as bad as in the developed world. The MSCI Emerging Market index was up 26.7% between 29 December 2006 and 24 July, but rose a comparatively tepid 7.8% between 24 July and 28 December.
The Sensex , however, broke loose from global trends and blazed a path all its own. Indian stocks zoomed after the subprime crisis hit the West. Between the beginning of the year and 24 July 2007, the Sensex gained 14.6%, while it went up 27.9% between 24 July and 28 December. The MSCI indices show that we’re the second best among all markets in the three months to 28 December and the third among all markets in the month to 28 December.
The crisis in the developed credit markets has, therefore, been rather good for the Indian stock market, at least so far. That’s easy to understand—with the Indian economy growing at 9%, why not bet on growth instead of sinking your money in the sluggish US economy? So, as the crisis deepens in the West, the theory goes, money will flee to the comparative safety of high-growth economies such as India and China. That’s the bull market case: the US slows down but doesn’t have a recession, the US Federal Reserve and other central banks cut rates to combat the credit crisis and stave off a slowdown, foreign investors bet on continuing growth in India and liquidity floods into the Indian market, creating a bubble that sends the Sensex up, never mind the high valuations.
FIIs turn net sellers
The trouble with that optimistic scenario is that the Sensex hasn’t been doing all that well in the last couple of months. Ever since the restrictions on participatory notes (PNs) were imposed on 26 October, FIIs have been massive net sellers in both the cash and futures segments of the market. Domestic institutional investors and retail players, meanwhile, stepped up their purchases, and more than offset FII sales.