The faster they rise…

The Sensex recovered smartly by about 650 points from its intra-day low of 9827 points to close Monday at 10482 points. But this was still 457 points lower than Friday’s levels, confirming that the correction is going strong.

Since the market peaked on May 10, the Sensex has lost 2131 points, or 17%.
Year-till-date gains have tempered down to 11.5%, from over 34% on May 10. The sharp fall in the last three trading sessions qualifies as one of the sharpest in the markets’ history.

The markets have dropped by 14% in just the past three days, higher than the 13% fall in the markets over three trading sessions when the markets went bust after the Harshad Mehta led rally in the early 1990s.

While the correction may have come too sharp, too soon, and it could be that it was exacerbated by selling due to margin calls, there’s no doubt that the correction itself was long due. Since the rally had begun in May 2003, the Sensex had doubled twice, from the 3,000-levels to over 12,000.

On an annual basis, the Sensex delivered returns of over 60% for three straight years.

True, corporate profits too were growing, but not at the same rate. In rare cases where some companies did report substantial jump in earnings over the past three years, the gain in its stock price has been much higher.

Besides, valuations in most sectors implied that strong earnings growth would continue for some years ahead. In fact, some brokerages like Citigroup feel that there’s room for further correction, since valuations are still high.

Apart from high valuations, the other trigger for the correction is a shift in global liquidity flows. Most emerging markets have fallen as a result of this. The reason Indian markets fell at a faster rate is that they had also risen at a faster pace (See table).

As far as the trend across sectors goes, it’s not surprising that the stocks from industries which had outperformed the markets are now underperforming. Thus, the metal index, which had risen 73% till May 10 this year, has fallen by 28% since.

But it’s important to note that all sectors have corrected sharply, irrespective of their performance earlier.

The IT index, which had underperformed with returns of 11% till May 10, has fallen by 14% since.

Although the rate of fall was lower than the Sensex, it wasn’t substantially lower - the Sensex fell by 17%. Similarly, for the outperformers, the rate of fall since May 10 hasn’t been substantially higher than the market fall.

As a result, year-till-date returns are still higher for sectors such as capital goods, metal, oil and gas, auto and FMCG. If the correction continues, it’s these sectors that should hog the limelight.

Contributed by Mobis Philipose