Mumbai: Investors rattled by the disclosure of an accounting fraud at Satyam Computer Services Ltd and the subsequent tumble in Indian equity prices could have reason to stay calm and wait for the dust to settle.
A study of how the US stock markets performed in the aftermath of similar scandals in that country shows that share prices usually regain lost ground within a week of the initial shock.
Benchmark price indices are up or down a year later depending on whether the incident of fraud occurred in the midst of a rising market or a declining one. The long-term trend is not affected by individual cases of corporate scams.
Also See The Fraud Factor (Graphic)
The data on the impact of fraud on overall stock prices was complied by the Indian unit of Noble Group Ltd, a UK-based research firm.
India’s most closely tracked equity price index, the 30-share Sensex of the Bombay Stock Exchange, lost 930 points, or 9%, in the two trading sessions after former Satyam chairman B. Ramalinga Raju on Wednesday said in a letter that he had fixed the company’s books in a Rs7,136 crore swindle that went on for “several years”.
The S&P 500 index of US stocks even overcame an initial panic attack when energy company Enron Corp. imploded in October 2001 because of risky bets and falsified financial statements, in what was one of the most high-profile corporate bankruptcies in the world.
Yet, the broadbased index was up 2% a week after the Enron disintegrated. It then rose further, a month after the Enron bankruptcy, though it was down 18% a year later because of the global downturn after the bursting of the tech bubble and the 9/11 terrorist attacks in New York.
But the S&P 500 was significantly higher a year after Cendant Corp., a New York- based provider of services to real estate and tourism industries, was accused of inflating revenues prior to a merger in April 1998.
The same month saw another case that shook the US markets, Sunbeam Corp., a manufacturer of small appliances, was involved in an accounting fraud.
The year 1998 was a tough one for global markets as they tumbled in the wake of the Asian financial crisis of 1997; but experts now see that episode as a blip in the extended bull market that began in the mid-1980s.
The cases of Enron, Cendant and Sunbeam suggest that large accounting and financial scams of the sort that Satyam has been involved in do not affect the long-term direction of stock prices.
But there are two counter examples.
Telecom company Worldcom Inc. got into trouble in June 2002 after chief executive Bernard Ebbers came under pressure from banks to cover margin calls on his stocks against which he had borrowed to finance his other businesses.
The S&P 500 was 13% lower a week later, 9% lower after a month and continued to be down 9% a year after the Worldcom scandal was out in the open.
In the case of Waste Management Inc., a company in the same business as its name, an accounting scandal in July 1999 did not disturb the US markets at first: the S&P 500 rose 23% in the next week and 17% in the next month, though it was down 5% a year later.
Top equity strategists across Asia are advising institutional clients, mainly hedge funds, to take short-term bets on Indian stocks.
The Sensex is down 2.5% so far in 2009, after ending with a 52% loss in 2008.
“With India now trading at a discount to Asia ex-Japan, earnings expectations slashed, and a tremendous amount of monetary stimulus in pipeline, the case for India has improved dramatically recently,” according to the 8 January Asia strategy report by analysts Daniel McCormack and Tim Rocks at the brokerage arm of Macquarie Bank Ltd.
Macquarie has advised investors to increase their exposure to Indian stocks relative to those in markets such as China and Hong Kong that it says have a high beta, a measure of how closely a particular stock or stock index is correlated to a broader market.
A high beta market lurches more than the benchmark it is compared to.
The brokerage arm of French bank BNP Paribas also recommends India for short-term bets. “I see more upside to India as it has underperformed China 43% since the 27 October low,” said Clive McDonnell, head of equity strategy at BNP Paribas Securities (Asia) Ltd, in a 7 January Alpha Strategy report.