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Global meltdown - Views on News from Equitymaster
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  • Jul 27, 2002

    Global meltdown

    With a free fall on the U.S bourses, global equity markets, for the week ended, resemble the remnants of a battleground. And what is even more frightening, investors' are not sure whether the worst is over. With excessive optimism also comes excessive pessimism. The greed-fear cycle seems be playing out.

    Earlier in this space, we had mentioned that U.S markets could experience further test of strength. While economists' debate over V and W shaped recoveries, markets are more unforgiving looking only at corporate earnings and that too, genuine earnings. U.S corporate earnings were practically wiped out with the downturn gaining momentum in 2001. Corporate America experienced five consecutive quarters of lower earnings. On the other hand, with markets not correcting in line with earnings, valuations continued to remain rich. The same indicates that investors built in assumptions of a quick recovery but with the same premise under question, a re-think on valuations was on the cards. Accentuating doubt was the outbreak of accounting jugglery and corporate malfeasance.

    Having said that, the steep drop in U.S markets was most likely to be followed by a relief rally. Volumes on the bourses have almost doubled, which could signal the na´vetÚs' finally exiting equities, as they no longer can bear to see their capital erode. This seems to be a purging process with greed ending in fear and thus completing a market cycle. However, negativity has gained momentum and 'wrongs' of the system are likely to be more in focus. Therefore, bias is likely to be on the downside, as markets try and find their feet. The bottoming process is likely to get support as valuations have corrected to a large extent and earnings for quarter ended June '02 have registered positive growth. Momentum in earnings could continue into 3 and 4Q offering support to the market.

    Reflecting the trend globally, domestic equities nose-dived this week. The decline in markets seems more due to traders taking advantage of lack of investor confidence. Absence of large participation and selling by UTI could be leading to an equity overhang. Also, reports of poor monsoons seem to have provided support to traders. Domestic markets seem to be caught in a downward spiral. Investors need to recognize that the domestic economy is on an upswing. The six core sectors, which constitute 27% of the index of industrial production, have reported growth of 5.7% YoY. Corporate results for quarter ended June '02 have come in above expectations. And with the slide, valuations of blue chips have only become more attractive.



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