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Investor Connect Roadshow 2008

The document discusses the rise and fall of the Indian stock market (Sensex) in early 2008. It notes that the Sensex peaked at over 21,000 in January 2008 due to liquidity, leverage, and retail participation, but was not backed by fundamentals. The Sensex then crashed over 30% to below 15,350 by March 2008. The document compares this crash to previous crashes in 2000, 2001, 2004, and 2006, looking at the percentage stock declines, flows of foreign and domestic institutional investors, and potential economic causes. It questions if 2008 marks the beginning of a bear market like 2000, but notes some key differences in economic indicators between the two periods.

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0% found this document useful (0 votes)
76 views29 pages

Investor Connect Roadshow 2008

The document discusses the rise and fall of the Indian stock market (Sensex) in early 2008. It notes that the Sensex peaked at over 21,000 in January 2008 due to liquidity, leverage, and retail participation, but was not backed by fundamentals. The Sensex then crashed over 30% to below 15,350 by March 2008. The document compares this crash to previous crashes in 2000, 2001, 2004, and 2006, looking at the percentage stock declines, flows of foreign and domestic institutional investors, and potential economic causes. It questions if 2008 marks the beginning of a bear market like 2000, but notes some key differences in economic indicators between the two periods.

Uploaded by

KINGER4715
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPT, PDF, TXT or read online on Scribd
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JM Financial Mutual Fund

Investor Connect Programme


April 2008
Rise and fall of stock markets/prices is
guaranteed!
A Basic Reminder
• Invest for the Long term
• Price of the company will change daily but not
the value of the company. It’s the value that
finally drives the price.
• Do not follow the herd – draw your own path
• Be disciplined
• Markets in the long run will depend upon
a) Macro Factors – Economy
b) Corporate India performance
Boom…bang…crash!!
Sensex peaks at 21000 levels in Jan 2008

Euphoria
Sensex crosses Sensex crashes to
18000 in Oct 2007 15332 on Jan 22 2008
Crash thereby retracing to
(sharp rally of 4000 Belief Aug 2007 levels
pts in 1 ½ mths)
(within 7 trading
sessions of
achieving a peak)

Disbelief

Se n 0 08
sex
unde s in Mar 2
l eve l
r 130 0
00 in t 150 0
Apr e x bac k a
2007 Sens
Last Leg for Up Move was backed by

- Liquidity
- Leverage
- Rumour mongering
- Huge Retail participation

But was not backed by FUNDAMENTALS


2000 - Statistics
Feb 2000 – Sensex Peak Jan 2004 – Sensex Bounce back
5933 6026
% of Stock Fall % of Stock Rise

> Sensex > Sensex

Flows 54% 51% Flows


•FIIs – Rs 43 bn •FIIs – Rs 484 bn
•Domestic –Rs 4 bn •Domestic – Rs (75) bn

3920
May 2000 – Trough

4 yrs

• Dotcom bubble
Source: Bloomberg
2001 - Statistics
Aug 2001 – Sensex Peak Nov 2001 – Sensex Bounce back
3318 3322
% of Stock Fall % of Stock Rise

> Sensex > Sensex

Flows 33% 56% Flows


•FIIs – Rs (4.5) bn •FIIs – Rs 9.6 bn
•Domestic –Rs 1.1 bn •Domestic – Rs (10.7) bn

2600
Sep 2001 – Trough

3 months

• September 9 /11
Source: Bloomberg
2004 - Statistics
Apr 2004 – Sensex Peak Nov 2004 – Sensex Bounce back
5925 5973
% of Stock Fall % of Stock Rise

> Sensex > Sensex

Flows 29% 69% Flows


•FIIs – Rs (25) bn •FIIs – Rs 124 bn
•Domestic –Rs 13.3 bn •Domestic – Rs (17) bn

4505
May 2004 – Trough

7 months

• NDA government collapsed


Source: Bloomberg
2006 - Statistics
May 2006 – Sensex Peak Oct 2006 – Sensex Bounce back
12612 12736
% of Stock Fall % of Stock Rise

> Sensex > Sensex

Flows 80% 34% Flows


•FIIs – Rs (103) bn •FIIs – Rs 144 bn
•Domestic –Rs 56 bn •Domestic – Rs 17 bn

8929
Jun 2006 – Trough

5 months
• Concerns that US will raise rates and draw overseas investors away from
emerging markets and surging commodity prices will hurt company
earnings.
Source: Bloomberg
2008 - Statistics
Jan 2008 – Sensex Peak Sensex Bounce back - ??
20812
% of Stock Fall
> Sensex
Flows 81%
•FIIs – Rs (149) bn
•Domestic –Rs 54 bn

15357
Mar 2008 – Trough

?? months

• Sub-prime crisis
Source: Bloomberg
2008 Crash – Most Vicious
  Date SENSEX INDEX change
  From To From To %
1 Jan-08 Mar-08 21206 14677 -30.79%
2 Feb-07 Mar-07 14723 12316 -16.35%
3 May-06 Jun-06 12671 8799 -30.56%
4 Apr-04 May-04 5979 4227 -29.30%

  Date BSEMDCAP Index change


  From To From To %
1 Jan-08 Mar-08 10113 5805 -42.60%
2 Feb-07 Mar-07 6187 5114 -17.34%
3 May-06 Jun-06 6033 3721 -38.32%
4 Apr-04 May-04 2337 1768 -24.35%
Source: Bloomberg
Key Question in Investors Mind

• Is the 2008 stock market crash similar to


2000 crash and would this mark the
beginning of the bear market?
2000 v/s 2008
2000-01 *2007-08
Fwd P/E ratio 35x 16x
Savings 23.7% 34.7%
(as a % of GDP)
Investments 24.3% 35.9%
(as a % of GDP)
GDP growth 4.35% 8.73%
Inflation 7.16% 4.21%
Earnings growth 4.43% 17-20%

Other comparisons:
• Only driver of markets in 2000 was the TMT sector
• Rally & the crash now much more broad based
• Tata Motors, Tata Steel, M&M making losses in 2000
• IT cos much stronger and much bigger
* estimates
Corporate Profits Surpass Index Growth
Date Sensex Agg BSE 500 Net Profit (Rs Crs)
Apr-98 3993 33755
Apr-99 3519 31101
Apr-00 5053 37019
Apr-01 3566 45487
Apr-02 3506 45371
Apr-03 3117 70028
Apr-04 5788 90077
Apr-05 6604 119719
Apr-06 11747 136909
Apr-07 12455 195769

Mar-08 16217 254500


     

10 yr growth 4.1 times 7.5 times


10 year data reveals that ….

Source: Bloomberg; Edelwiess


…profits in the broader market have grown faster than the Sensex
Consistent Earning Growth
EPS Growth (%) Sensex Sensex growth
FY98 247.0 6.9 3,969.6 15.8%
FY99 240.5 (2.6) 3,686.3 -7.1%
FY00 274.4 14.1 5,001.3 35.7%
FY01 235.8 (14.1) 3,604.4 -27.9%
FY02 251.3 6.6 3,500.2 -2.9%
FY03 293.7 16.9 3,081.0 -12.0%
FY04 354.1 20.6 5,740.9 86.3%
FY05 435.7 23.1 6,605.0 15.1%
FY06 478.4 9.8 11,280.0 70.8%
FY07 653.3 36.6 13,072.1 15.9%
FY08 865.0 32.4 15,800.0 20.9%
FY09E 1,012.1 17.0 ? ?
• Indian corporates have been delivering consistent growth for last 5-6 years
• Markets have been rising from levels to 1200 in Fy01 to 4900 in Fy08 at a CAGR of 20% p.a.
• In FY07 and FY08; Sensex has grown slower than the Sensex EPS growth; thereby anticipating a slowdown in
future earnings
• As the growth outlook improved; Sensex likely to give disproportionate returns
Source: Bloomberg; Edelwiess
Economic Fundamentals - Robust
Investments as a Savings as a
Real GDP Inflation % of GDP % of GDP
% Y-o-Y % Y-o-Y % %
1997-98 4.30 4.40 25.3 23.80
1998-99 6.68 5.95 23.3 22.26
1999-00 6.44 3.27 25.9 24.81
2000-01 4.35 7.16 24.3 23.74
2001-02 5.81 3.60 22.8 23.47
2002-03 3.84 3.41 25.2 26.40
2003-04 8.52 5.46 28.2 29.81
2004-05 7.45 6.48 32.2 31.77
2005-06 9.40 4.38 35.5 34.28
2006-07 9.62 5.42 35.9 34.77
2007-08 8.73 4.21 36.3 * 35.05*
Source: CSO, CMIE, RBI, Edelweiss, * estimates
• Economic fundamentals have been robust and key metrics have consistently improved

• Current level of Saving and investments can sustain 8% growth


Is There Enough Liquidity?
• Record US$100bn of outflows from global equity funds, 80% of which
pertains to developed markets, 20% to emerging markets
• Taiwan, Russia, Middle East, Africa are the only market-funds that saw
inflows
• Money is moving to money market funds that saw inflows of US$140bn. MM
funds have ballooned to US$3.5trn in the US. A lot of money is thus now on
the sidelines; these will flow into riskier assets once climate improves
• Commodity funds saw inflows of US$3bn, 3x YoY. There is over-heating
here, commodities look very vulnerable
• More than 50% of the 25-top US mutual funds have seen outflows in their
equity funds  

• The above statistics show that the risk aversion is at a peak in equities
• Liquidity is ample but there seems to crisis of confidence
• Commodities cooling will release liquidity into oversold equity markets
The Crash and Carnage was backed by
- Low Liquidity
- Heavy Shorting/hedging activity
- Rumour mongering
- Problems with US financial system

But again driven more by fear than only


fundamentals

Fundamentals are still strong


Where can the Sensex go?
  FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 FY2018
EPS growth 20 20 20 17 17 17 15 15 15 12
Sensex EPS 1010 1212 1454 1702 1991 2329 2679 3081 3543 3968
P/E                    
12 12120 14544 17453 20420 23891 27953 32146 36967 42512 47614
13 13130 15756 18907 22121 25882 30282 34824 40048 46055 51582
14 14140 16968 20362 23823 27873 32611 37503 43129 49598 55550
15 15150 18180 21816 25525 29864 34941 40182 46209 53141 59517
16 16160 19392 23270 27226 31855 37270 42861 49290 56683 63485
17 17170 20604 24725 28928 33846 39600 45539 52370 60226 67453
18 18180 21816 26179 30630 35837 41929 48218 55451 63769 71421
19 19190 23028 27634 32331 37828 44258 50897 58532 67311 75389
20 20200 24240 29088 34033 39819 46588 53576 61612 70854 79357
21 21210 25452 30542 35735 41809 48917 56255 64693 74397 83324
22 22220 26664 31997 37436 43800 51246 58933 67773 77940 87292
Pls note: the above calculations are based on hypothetical assumptions about the EPS growth rate and the P/E ratio
JM Financial Mutual Fund

Technical Analysis
Technical View - Crude oil

•The crude oil prices are looking heavily overbought on the charts
•The most likely scenario is  a correction to USD 90 levels
•A breach of this level is likely to take crude oil to USD 80 levels
•Crude oil would lead the fall in other industrial metals and gold
Source: Reuters
Technical View - BSE 500

•The BSE 500 index has climbed back after breaching the long term support line in early March
•A move above the trend line will indicate that the long term trend remains intact

Source: Reuters
Technical View - BSE Midcap

•The BSE Midcap index has breached the long term trend line thrice over the last three years
•Typically this happens during times of panic
•The index is looking oversold in term of stochastics
•The index should bounce back over the long term trend line over the next three weeks
Source: Reuters
Technical View - MSCI Emerging Markets Index

•The Morgan Stanley emerging markets index is showing the formation of a double bottom on
the charts
•This reflects that the index might have bottomed out in the near term
Source: Reuters
Technical View - BSE Sensex Index

•The long term chart of the sensex reflects that the index has been able to come back into
the long term channel
•As long as this index remains in the channel the positive trend will remain intact and the
index should rally to the upper end of the channel over the next few weeks
Source: Reuters
Higher September - Way to go?
  Sensex Values

Year 31-Mar 30-Sep growth

2003 3,049 4,453 46.1%

2004 5,591 5,584 -0.1%

2005 6,493 8,634 33.0%

2006 11,280 12,454 10.4%

2007 13,072 17,291 32.3%

Source: Bloomberg; Edelwiess


Key Statistics - JM Schemes
JM ELF JM Basic JM HIFI JM Equity BSE Sensex

P/E ratio (FY09) 10.8x 12.4x 10.4 13.6x 15.3

Profit growth (FY09) 65.0% 51.7% 40% 38.5% 17.0%

Source: JM Financial MF research


Synopsis
• Indian markets are cheap and trading below fair value
• Indian markets can move up by 20% in the next 3-4
months
• Subsequently, markets will be driven by movements in
commodity prices and RBI’s credit and monetary
measures
• Q1 results in developed economies should bring out the
most of the losses in the balance sheets of the global
financial majors.
• Thus we believe that the worst of the sub-prime crisis will
be behind us post the Q1 results
• There is no change in the long term trend of the market
JM Financial Mutual Fund

Thank You !!

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