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Time for introspection

Dec 30, 2000

Consider this: In 1999, the BSE 30 Index gained a significant 64%. This in a year when India went nuclear, fought in Kargil and political turmoil was at its height. In 2000 when a stable government is in place and the finance minister seems to be getting a grip on the deficit, the Sensex tanks by 26%. Why so?

The answer is simple. Indian bourses suffered from the NASDAQ syndrome. In the hype of getting ten baggers, the market movers went 'tech overboard', losing sight of the ground realities. No doubt, the technology stocks offered immense growth opportunities, but the valuations accorded to them were unrealistic. P/e multiples of 100-200 times became a routine. Seeing the potential, both the BSE and NSE changed their Index composition to accommodate more technology stocks. That's where the bourses were guilty: guilty of myopia.

The trouble began when some of the market movers realised the vast difference in valuations of the domestic software companies and their respective ADRs on the NASDAQ. That's when the Indian technology stock valuations finally entered the golden bull run. Indian bourses followed what was happening worldwide. These companies were doubling their profits year on year and hence, the premiums on their valuations were justified by market movers.

But even at 100% growth rates, a P/e multiple of 900-1,000 times earnings was simply unjustified. Reality struck and the bubble burst. The NASDAQ tumbled 40% in 2000 and Indian bourses followed suit. But investors like Warren Buffett who kept their head finished the year with over 25% gains.

This is a good time for introspection both by the regulators and the investors. 2000 was one of the worst years for Indian bourses, but the lessons 2000 has taught are invaluable. As 2001 approaches, it is time to show that those lessons are well learnt.

2001 has much to offer. Disinvestment engines have finally begun to roll, the IIP has begun showing signs of improvement and the oil import bills seem under control. The finance minister and his team continue to work towards bringing the deficit under control, political compulsions notwithstanding. India is one of the emerging economies and Indians are amongst the frontrunners in the technological revolution.

With that comforting thought, a Happy New Year to you all.


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