Jan 2, 2001|
Sensex: The year that was
The BSE Sensex ended Year 2000 with a loss of 26%. The loss was fueled by the TMT (Technology, Media and Telecom) sector. To underscore the impact on the Sensex it needs to be highlighted that the TMT stocks lost 46% of their market value during the period under study.
The petrochem and energy sectors on the other hand logged an increase in an otherwise falling market. Attractive valuations and improving fundamentals attracted investors to these sectors. The sector leader, Reliance Industries, gained an impressive 34%. Among others, ITC (the tobacco major) and Nestle (a foods company) gained a remarkable 25% and 22% respectively. On the other hand, FMCG giant HLL lost 14% of its market value due to concerns regarding topline growth.
From the table it seems that overall market valuations have become synonymous with the valuations of TMT stocks. The reasons for this are not far to seek. At a level of 5,500, the BSE Sensex was modified to include Dr. Reddy’s, Reliance Petroleum, Satyam Computers and Zee Tele. At these levels Satyam and Zee were quoting at their all time highs. This led to a disproportionately high weightage for the TMT sectors in the Sensex. The volatility in the Sensex was also partly due to these volatile and heavily weighted stocks. To give an example, Zee, which at one time was having the highest P/E multiple across Asian markets, witnessed a 77% erosion in market capitalization during Year 2000.
Further, once the market started taking cue from the tech heavy NASDAQ, the BSE Sensex was soon struggling to maintain its poise. Earnings warnings by major US companies caused weakness on the NASDAQ. Consequently the NASDAQ lost around 40% of its value. Indian TMT stocks responded to this meltdown. One reason for this was that Indian software companies derive around 56% of their revenues from the US markets. Investors were concerned that with a slow down in the US economy, billing rates of the Indian companies were likely to get impacted, which in turn could suppress operating margins.
There was a clear divergence of valuations between the old economy and the new economy stocks (though a significant portion of this had been corrected by the end of the year). Realizing that most of the old economy stocks in the Sensex were trading at attractive valuations, buying interest in the markets shifted from TMT stocks to the old economy stocks. The markets have since started according valuations to well-managed and fundamentally strong companies (irrespective of their being involved with TMT or not). Consequently, the weightage of the old economy stocks in the Sensex improved as compared to the earlier this year.
The fundamentals and management of the company play a crucial role in determining the market valuation of a company. No doubt aberrations occur, like they did earlier this year. But as this study rightly points out, sooner to later semblance (i.e. fundamentals) prevails. So the next time there is frenzy in the markets, look back at Year 2000 before you make an investment decision!
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