From the way stock markets have galloped, it seems the subprime crisis that roiled stock markets world over just three months ago.
Sensex has gained 42.8% since the US crisis but last word is yet to be said
MUMBAI: From the way stock markets have galloped, it seems the subprime crisis that roiled stock markets world over just three months ago, and had many predicting gloom, has been forgotten and brushed aside.
The Sensex has recovered all that it lost in that one month between end-July and August-1,805 points or 11.5% to be precise-and has been cruising along at a rapid clip.
In fact, from the subprime-effected bottom of 13,989 made on August 21, 2007 to now, the index has gained 42.8%, almost as much as it returned in the whole of 2005 and 2006 (42.33% and 46.70% respectively).
This Monday, it even had the audacity to flirt, though briefly, with the 20,000 mark.
Vikram Kotak, chief investment officer of Birla Sun Life Insurance, in a recent interview to DNA Money had said, “We feel concerns relating to liquidity after the subprime crisis are abating.”
This 42.8% climb from the bottom is the second-highest in the Asian region, after the Hang Seng’s (the benchmark index in Hong Kong) unbeatable 49.4% climb from its subprime-effected bottom.
That’s not to take away from other Asian markets, all of which have recovered and have posted excellent returns from there (see chart).
“The extent of damage in the US itself was not very large. What the subprime crisis achieved was to bring theperforming emerging economies into the spotlight and divert fund flows towards such economies,” said Deepak Jasani, head of retail research at HDFC Securities.
The subprime crisis refers to a credit crisis in the US triggered by high-risk borrowers defaulting on their home loan repayments due to higher interest rates.
As these loans were bundled and sold in the securitised form to others such as hedge funds and portfolio managers, the non-repayment meant that these securitised assets went bust.
A Bloomberg report says that this crisis cost the world’s largest banks and
securities firms more than $30 billion in bad loans and trading losses in the
quarter.
To make good their losses in these mortgage-backed securities, fund managers resorted to rebalancing their portfolios, as a result of which massive outflows were witnessed from the Indian and other equity markets where they had invested.
But as Jasani says, the crisis sure brought the spotlight on the emerging economies. India, one of the most cocooned markets from external shocks, naturally became a first choice for global fund managers.
In the last three months, from the end of August, foreign institutional investors have been net buyers of Indian equity worth around $9 billion.
But as we get into November, when payment obligations on a number of these subprime loans get reset, one can only hope that it will not trigger another meltdown.
“One is not sure as to whether the last word has been pronounced on the subprime crisis in the US. If the final impact is much worse than what has come out, then our economy (and hence the market) will also feel the pain,” said Jasani.
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