Now that the last of the bulls has thrown in the towel, it’s worth revisiting that age-old question asked of every bear market: How low can it go?
History is admittedly an imperfect guide. Nevertheless, we must consider what happened during the last bear market of 2000-03. The first thing to remember is that it lasted for a long time--the Sensex on the Bombay Stock Exchange (BSE) peaked in February 2000 and it wasn’t till June 2003 that it started a sustainable rise. That’s 40 long months. Compared with that, the current bear market is a baby, just four months old.
Next, the Sensex fell from a high of 6,150 points in February 2000 to a low of 2,594 in September 2001, a drop of 58%, although the September 2001 low may have been exaggerated, as it was a consequence of the attack on the World Trade Center (WTC). But even if we take the low of 3,096 hit in April 2001, that’s a drop of 50% from the peak. This time, we’re nowhere near those lows—even after the fall this week, the Sensex is down 29.8% from the peak it scaled last January.
But then, there’s a lot of difference between 2000 and today. India’s gross domestic product (GDP) growth was 6.4% in 1999-2000, it went down to 4.4% in 2000-01 and bounced back to all of 5.8% a year later. Nobody, not even the most pessimistic, is forecasting those growth rates at present. Corporate balance sheets were also in much worse shape during the last downturn, because of the debt binge that preceded it. This time, although concerns exist about convertibles and unwinding forex hedges, companies are in better shape.
On the debit side, however, commodity prices were nowhere near where they are today. The International Monetary Fund’s fuel price index was at 28.235 in 2000 and it’s forecast to be 95.5 in 2008. IMF’s food price index, which was at 82.121 in 2000, is estimated at 150.437 this year. Similarly, the metals price index, which was at 62.699 in 2000, is projected to be 180.871 this year.
Moreover, the last downturn was the result of excesses in one sector and all asset prices did not see the steep rise they saw in the last four years. US consumption, one of the main locomotives of world growth, was largely unaffected in 2000; this time, with the crash in housing in the US, consumption may falter. And finally, big global banks were not teetering on the edge of disaster in 2000.
A silver lining is that while global GDP growth plunged from 4.6% in 2000 to 2.2% in 2001 and was at 2.8% in 2002, this time IMF estimates forecast global growth to slow from 4.9% in 2007 to 3.7% this year and to remain around that level next year. Moreover, global inflation is forecast to be 4.7% in 2008, not much higher than the 4.5% for 2000. But whether those estimates correspond to reality is debatable.
Perhaps a better way would be to consider the price-earnings multiple at which the market was valued in 2000-02 and the current price-earnings or P-E multiple. With so much uncertainty surrounding future earnings, a multiple of trailing earnings could give a better picture. In 2000, the National Stock Exchange’s Nifty index reached a high of 28.47 times trailing earnings and 5.11 times book value in February before starting the long, slow slide down. By October 2000, the Nifty’s P-E multiple fell to 17.65, the lowest level reached that year. By April 2001, it was at 14.44, later plunging to 12.30 on 21 September 2001, in the aftermath of the WTC attack. A year later, in October 2002, the Nifty traded at 13.8 times trailing earnings and 2.3 times book value per share.
This year, the Nifty P-E reached a high of 28.29 in January before starting to go down. On 10 June, the multiple was 18.9 and the price to book at 4.6. We have a long way to go.
How did the different sectors perform during the 2000 downturn? Well, obviously the information technology (IT) sector was the most affected then, with the BSE IT index losing a whopping 89% of its value between peak to trough. But IT was perhaps an exception, because the upwards move and the resulting crash happened largely in the tech sector. The BSE Capital Goods index lost 60% of its value between peak and trough, the FMCG index 47% and the Healthcare index 57%. NSE’s Bank Nifty index lost a comparatively lower 31%. But there was no place to hide.
Write to us at email@example.com