With the increasing probability of a recession in the US in 2008, it’s worth taking a look at what happened to the Indian market the last time the US had a recession.

That happened in 2001, after the bursting of the so-called New Economy bubble. How did the Indian market react to the downturn in the US in 2001?

Over the period January 2001 to December 2002, the Dow Jones Industrial Average (DJIA) went down by 22.7%, while the Sensex fell by 14.6%. At first sight, that looks comforting. But again, much depends on the starting date for the comparison. If the fall from the record highs reached is taken, the DJIA was down 30% in December 2002 from the heights it had reached in January 2000. In contrast, the Sensex was down 45%.

However, there are many things that are different between now and 2000, the strength of the Indian economy and the much higher interest in its market being the obvious dissimilarities.

What about valuations? The Sensex price-earnings multiple reached a peak of 30.6 in 2000 and a price-to-book multiple of 4.8. At present, the Sensex PE is around 26.8, while the price-to-book multiple is 6.5.

There are other straws in the wind. Support for the theory that the credit crisis in the West will lead to money fleeing to other markets comes from the new asset allocation at CalPERS (California Public Employees Retirement System). Reports say that the giant pension fund will be shifting an addition $24 billion (Rs94,560 crore) into its international portfolio. Of course, not all of this will find its way to emerging markets, but it does raise the possibility that a large chunk of it will.

The pension fund’s allocation to public equities will now be evenly divided into US and international equities. This is part and parcel of the trend towards diversification of its portfolio to reflect more truly the global economy. The company’s private equity assets too will be equally divided between the US and overseas investments.

Analysts also expect that, with CalPERS setting the trend towards more allocation to international equities, other pension funds are bound to follow.

Meanwhile, CLSA has increased its recommended weight on India by two percentage points in its Asia ex-Japan portfolio to 13%. It trails China, with a weight of 24%, Korea with 19%, Hong Kong 16% and Taiwan 14%. But CLSA is overweight India compared with the MSCI Asia ex-Japan index, which has a weight of 11.8% for India.

Fund-raising in 2007

According to Bloomberg’s 2007 India capital market league tables, corporate India raised funds worth Rs2.36 trillion in 2007, 33% higher compared to the amount raised in 2006. (Funds raised in overseas markets are reported in dollar-terms by Bloomberg and have been converted into rupees at an exchange rate of 40 for 2007 and 45 for 2006.)

There has been an increasing preference for equity and equity-linked instruments such as foreign currency convertible bonds (FCCBs), which is understandable considering that interest rates have been on the rise, on the one hand, and equity valuations have soared, on the other.

Equity issuances took the lead with 56% of the total funds raised being equity-linked in 2007, compared to 48% in 2006.

This trend was more evident in the domestic segment, where equity issuances jumped 60% over the previous year, while debt issuances fell 11%. Qualified institutional placements (QIPs), a new product introduced by the Securities and Exchange Board of India last year had a large role to play in the increase in domestic equity issuances, accounting for about 60% of the incremental amount raised.

Quarterly data shows that QIPs have increasingly been taking share from depository issuances such as Global Depository Receipts and American Depositary Receipts.

But overseas equity issuances haven’t been affected much. On the contrary, the total amount raised through such issuances increased by 65% in dollar terms, higher than the increase in the amount raised domestically. The share of depository issuances and FCCBs fell marginally in local currency terms though, owing to the appreciation in the rupee. Corporates that want to establish presence in overseas markets continue to prefer overseas issues. Besides, companies who have a large chunk of capital expenses in foreign currency or ones who are planning overseas acquisitions have relied on overseas issues.

Also, certain restrictions in the QIP guidelines have stunted the prospects of a convertible bond market domestically, which essentially means FCCBs are the only means by which Indian companies can issue equity at a substantial premium.

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