X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
2007: The Famous Five - Views on News from Equitymaster
 
 
  • PRINT
  • E-MAIL
  • FEEDBACK
  • A  A  A
  • Jan 1, 2008

    2007: The Famous Five

    We had dubbed 2007 as the 'year of the unknown' in our review of 2006 and predictions for 2007 a year back - 'unknown' because we were not sure whether the Indian economy would continue to fare as well as in the previous three years. Or whether 2007 will see the Sensex repeating its performance of the previous three years. The economy did fare well, and the Sensex roared as it had done in the previous years. But the 'unknowns' that hit us were the sub-prime crises emanating from the US, the Indian rupee's nerve wracking upward move, the P-Note shocker from the SEBI and valuations of power stocks (which moved from being high to disagreeably high!).

    Here are the famous five that we believed crowded investors' minds during the year.

    1. Sub-prime: What an impact did this have on global markets and financial system! 'Subprime' was perhaps the biggest event that marred both the international and the domestic stock markets in 2007. Most of the world's well-known financial giants like Bear Sterns, Lehman Brothers and Merrill Lynch created complex derivatives based on sub prime loans, which were marked to market and sold. The crisis arose when defaults on these sub prime loans surfaced having a dampening effect on other forms of credit as well. While big hedge funds such as Bear Stearns amongst others had to report bankruptcy, global banks were not spared either and the largest of the lot i.e., Citigroup reported a massive 60% drop in its third quarter earnings for the year. Since complex financial instruments were created around these sub prime loans, valuing the same proved to be a difficult task, as a result of which, the extent of the crisis could not be gauged.

      The overall uncertainty that followed took its toll on global equity markets - until the US Federal Reserve and its counterpart in Europe decided to unleash a fresh dose of cheap money (to the defaulters, of course!). This liquidity injection was because the sub-prime crisis had dried up liquidity in the global financial markets as concerns of a contagion spread far and wide.

      Readers would do well to note that the inflation in asset prices over the past 3-4 years has been largely a result of high levels of liquidity induced by cheap money globally. Now, with money drying out as investors become apprehensive and hold their funds tight (or investing in the rather safe government treasuries), the global financial markets are witnessing increasing levels of risk. The situation was no better as we closed in on the year. The US economy faces a housing market led recession, the exact nature of which will be unraveled only in 2008.

    2. Sensex: After a 44% YoY rise in 2005 and 2006 each, the BSE-Sensex repeated the performance almost to the tee in 2006 as well (46% YoY rise). This surge in the Sensex can largely (or very largely!) be attributed to just three stocks - Reliance Energy, L&T and Reliance Industries. While the index was severely hit a number of times owing to global financial and credit issues, there was really no stopping the surge that followed these hiccups. What is more, the index trumped most of the other emerging markets in the world (except China, Indonesia and Pakistan), backed by continuance of strong earnings growth and flow of easy (and cheap) money from foreign and domestic investors. The Sensex gains were however dwarfed by those achieved by the BSE-Midcap and BSE-Small cap indices - 69% and 94% respectively.

      Top gainers & losers on Sensex
      (Rs) 28-Dec-06 31-Dec-07 Change
      Gainers
      Rel. Energy 521 2,161 314.4%
      L&T 1,437 4,196 192.0%
      Reliance 1,277 2,901 127.2%
      BHEL 1,154 2,581 123.6%
      Tata Steel 477 939 97.1%
      Losers
      Infosys 2,248 1,773 -21.1%
      Tata Motors 905 741 -18.2%
      Cipla 253 214 -15.4%
      Wipro 608 526 -13.5%
      TCS 1,209 1,090 -9.8%

    3. P-Notes: This shocker came from the stock market regulator, SEBI. As a matter of fact, the sharp rise in the benchmark BSE Sensex over the last 3 years has been attributed to FII investments, with 75% of floating stock in the hands of FIIs and 50% of the stocks held by FIIs being in the form of participatory notes (P-Notes).Further, the incessant FII inflows also brought a sharp acceleration in the rise of rupee against the US dollar. It is in this backdrop that the regulator, SEBI, introduced restrictions on P-Notes in October, citing concerns over the copious inflows and anonymity that P-Notes offer. The proposed restriction on the issue of fresh P-Notes by FIIs brought significant albeit momentary apprehensions in the minds of investors.

    4. Rupee: For better or for worse, 2007 was a considerably eventful year for the Indian rupee. The currency appreciated by around 11% against the US dollar and wrecked havoc on the export oriented sectors such as software, pharma and textiles, while proving to be beneficial to the oil industry. The decline of the dollar against major world currencies and the surge of FII inflows into the country contributed to the sharp appreciation of the rupee. Besides this, in the early part of the year, the RBI refrained from actively intervening in the forex market in a bid to contain inflation, which had shot up to 6%. Not only the FII inflows, the external commercial borrowings (ECBs) and FDI inflows were also instrumental in stepping up the liquidity. This prompted the RBI to place controls on the extent of ECBs to be allowed in the country besides increasing the limit of investments abroad.

    5. Reliance: Did you hear anything else on the street? The 'R' group companies, those with earnings and those with none, those of the elder brother and those of the younger, kept the bulls berserk during the year. Reliance Energy, for instance, deserves a special mention here as the stock led to a re-rating of the entire power pack, simply on the dreams that have been shown of the planned gargantuan expansion over the next 10 years. Power stocks, which were trading at trailing 12-month P/Es of 15 to 20 times rose to trade at P/Es like 37 times (Tata Power) and 54 times (Reliance Energy)! Especially for the latter, much of these valuations factor in what the company plans to achieve in the next 10 years. As a matter of fact, this company has a history of under-achievements in the past and is now talking of 'ultra-mega' plans for the next 10 years. Even if the achievement is to be 100% (better than the best case scenario!), our calculations show that the valuations have been brought to atrociously high levels!

      The R-pack jamboree
      28-Dec-06 31-Dec-07 Change
      Rel. Nat. Res. 22 182 712.5%
      Rel. Capital 607 2,595 327.2%
      Rel. Energy 521 2,141 310.6%
      Rel. Ind. Infra. 549 2,189 298.8%
      Rel. Petroleum 63 223 255.2%
      Adlabs 435 1,370 215.2%
      Reliance Inds. 1,277 2,886 126.0%
      Rel. Comm. 477 741 55.3%

      Other eye poppers from the 'R' camp were Reliance Natural resources and Reliance Petroleum, which have no real earnings on their books but have still lured investors for the growth they promise in the future. That's 'future discounting' at its best!

       

       

      Equitymaster requests your view! Post a comment on "2007: The Famous Five". Click here!

        
       

      More Views on News

      How to Ride Alongside India's Best Fund Managers (The 5 Minute Wrapup)

      Jun 10, 2017

      Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.

      Think Twice Before You Keep Money In A Savings Bank Account (Outside View)

      Aug 22, 2017

      Post demonetisation, a cut in bank savings deposits rates was in the offing.

      A Darkness Is Spreading Across the US (Vivek Kaul's Diary)

      Aug 22, 2017

      Today, we are attacked by one preposterous thing after another, each of them even more absurd than the last.

      Dear PM Modi, India is Already Land of Self-Employed, and It Ain't Working (Vivek Kaul's Diary)

      Aug 21, 2017

      Most Indians who cannot find jobs, look at becoming self-employed.

      The Key Factor Pushing Gold Up These Days (Outside View)

      Aug 21, 2017

      PersonalFN explains the chief factor pushing gold prices up of late.

      More Views on News

      Most Popular

      A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

      Aug 10, 2017

      Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

      The Most Important Innovation in Finance Since Gold Coins(Vivek Kaul's Diary)

      Aug 10, 2017

      Bill connects the dots...between money and growth, real money and real resources, gold and cryptocurrencies...and between gold, cryptocurrencies, and time.

      Signs of Life in the India VIX(Daily Profit Hunter)

      Aug 12, 2017

      The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

      Bitcoin Continues Stellar Rise(Chart Of The Day)

      Aug 10, 2017

      Bitcoin hits an all-time high, is there more upside left?

      5 Steps To Become Financially Independent(Outside View)

      Aug 16, 2017

      Ensure your financial Independence, and pledge to start the journey towards financial freedom today!

      More
      Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
      Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

      LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

      SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

      Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
      Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407
     

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms

    S&P BSE SENSEX


    Aug 22, 2017 11:21 AM

    MARKET STATS