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Market Watch: A bear market? It’s not impossible...

Stocks of well-established companies have lost between 50 and 70 per cent of their market value in less than a week's time. Udayan Mukherjee takes a look.

india Updated: Jan 22, 2008 21:02 IST

It has been a traumatic couple of days for our market. Stocks of well-established companies have lost between 50 and 70 per cent of their market value in less than a week's time. That is the kind of damage that investors, and particularly traders, take a very long time to recover from. Most of the pain has played out in stock futures where traders have been butchered. While a considerable portion of the open interest has been wound down, there is still quite a bit of outstanding positions left: perhaps the reason mid-caps failed to recover as much from their lows as index stocks did on Tuesday. The purging continues there.

Point to point, the Nifty crashed 30 per cent from the recent high to its intra-day low of sub-4,500. When an index collapses 30 per cent in a week, the question about the possibility of a bear market has to be raised. It is an uncomfortable, even scary, thought but it is best not to be in denial and sweep it under the carpet. Let me begin by sticking my own neck out. I believe the case for a prolonged bear market is not very strong. That does not mean a thing as I could be wrong, my view coloured by four years of utter bullishness that one week of mayhem cannot alter easily.

There are many risks to this hypothesis. Local sentiment could be one. After a fall of such proportions domestic participation in equities could certainly die down for a long time. We have seen that after May 2006 when mid-caps underperformed for many quarters and individual portfolios languished. Globally, things are murky and there could certainly be panic withdrawals by global investors from equities as an asset class. It may be short-lived, but could happen. Coinciding with all this is some slowdown in our earnings trajectory before the ongoing capital expenditure begins to spur growth again in 2009-10. Having said all this, India seems much better placed than most other economies and markets. Our economic growth is robust, most of our key sectors are not expected to decelerate significantly on account of a global slowdown and domestic consumption should not be affected much by a financial market meltdown. My own feeling is that we may now need to consolidate in a lower price band for some time and to that extent a "bearish" patch is entirely possible for a couple of quarters. In any case, bear markets nowadays are more compressed as bad news gets factored in at the speed of light, as we have seen this week. Hard work may lie ahead for the next few months, but if one uses this zone to buy good quality stocks and hunker down I think it may be rewarding by the time the year is out. Maybe I am part of the classic story of being unable to see a bear market till it is upon us, yet would remain optimistic till the fundamentals worsen visibly. I hope it won't come to that.

Executive Editor, CNBC-TV18