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2008: The year of reckoning

Dec 27, 2008

2008 was the year of reckoning for bubbles formed across asset classes.

In India, the year began ominously as a much touted IPO listed at an embarrassing opening price. Half way across the world, the signs of an economy in recession were there for all to see. Weak employment data, plummeting house prices, foreclosures and defaults. Soon, investment banks began to tumble like nine pins. And the nightmare had just begun.

The next few months belonged to crude oil, as it bucked the trend of the equity markets to zoom to US$ 147 per barrel in July. However, from there on, even crude prices collapsed in a heap as the global liquidity crisis turned out to be far worse than anyone initially imagined.

As another round of bankruptcies hit Wall Street, the US government was left with no option but to step in. And bailout packages worth billions of dollars were announced in a concerted manner by central bankers all around the world. Several US financial institutions also needed direct intervention from the government. Not all companies (read US auto majors) were as lucky.

Stock markets worldwide fared terribly during the year. While the US declined 36%, Europe was also severely affected. While UK tumbled 35%, France lost almost 45%. It was no different for stock markets in Asia. The emerging giants, China and India, witnessed a precipitous fall, ending all discussions on the much touted 'decoupling theory'. The Chinese market tanked by 65%, while India lost 54%. One reason the 'decoupling theory' fell flat on its face is the importance of foreign Institutional Investors (FIIs) in emerging markets. It's no coincidence that the decline in Indian markets in 2008 coincided with FIIs taking out Rs 528 bn from the system. While domestic mutual funds (MFs) pitched in, net fund inflows on their count totaled up to only Rs 137 bn, not enough to stem the decline in indices.

Source: Yahoo Finance

Source: Yahoo Finance

Source: SEBI

Source: BSE

Source: BSE

Source: BSE

Table - Indian stocks - Movers and shakers during 2008

Company26-Dec-0726-Dec-08Change52-wk High/LowChange from 52-wk High
Top gainers during 2008 (BSE-A Group)
Hindustan Unilever 215 252 17.6%267 / 170-5.5%
Hero Honda 700 794 13.5%895 / 561-11.3%
GSK Pharma 1,036 1,126 8.7%1,212 / 800-7.1%
Nestle 1,367 1,410 3.1%1,880 / 1,200-25.0%
Colgate 401 405 1.0%521 / 341-22.3%
Top losers during 2008 (BSE-A Group)
Jai Corp Ltd 1,172 84 -92.9%1,450 /79-94.2%
Unitech 465 36 -92.2%547 / 22-93.4%
Omaxe Ltd 565 59 -89.5%585 /39-89.8%
Parsvnath Developers 423 45 -89.5%598 / 31-92.6%
Adlabs Films 1,415 166 -88.3%1,945 / 130-91.5%
Source: Equitymaster

The origins of the global financial meltdown can be traced to the US housing sector. Hence, its not a surprise that the worst performing BSE sectoral index for 2008 was realty, plummeting 83%. With the Olympics behind us and troubling economic conditions ahead, the outlook for commodities, particularly metals turned grim. This is reflected in sectoral index for metals, which declined 75%, making it the 2nd worst performing index.

Traditionally, FMCG and Pharma sectors are considered to be the best bets in a recessionary environment. It was borne out during the year as their sectoral indices declined the lowest- 15% and 35%, respectively.

Where do we go from here? Given the grim outlook for the world economy in 2009, it might seem natural to feel fearful. But think again. As Warren Buffett wrote in an editorial in the New York Times, equity markets bottom out before the real economy does. Hence, as we stand at the cusp of a new year, now is the right time to get back to investing.

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