Cover Story: The Coming Crash

You ain't seen nothing yet. The massacre on Dalal Street that began promptly at 7 p.m. on June 1, 1998--seconds after Budget 98 was commended to the august lower house of Parliament--was only the trailer. For, the real annihilation will unfold shortly. And all of us will wish it hadn't.

That dry-run demonstrated the havoc that could be wreaked by a Sensex--the 30-scrip Bombay Stock Exchange Sensitivity Index--that surrenders to the bears. At 12 noon on June 1, it was lolling at 3,823.15, coiled for a spring in the post-budget trading. At 8.15 that night, it was down in the dust, licking its wounds after a 180.47-point fall to 3,642.68.

By June 8, it had become a one-way road to disaster. Opening at 3,455.57 that day, the Sensex skidded by 161.38 points to a nadir of 3,256.51 at 2.29 p.m. before being rescued by the financial institutions.

But the vultures were circling. On June 15, 1998, they struck viciously, and the Sensex collapsed by 194.35 points to close at 3,152.96. The very next day, at 10.45 a.m., the sense of foreboding was complete when it fell to 2,961.81--almost a point of no-return--before being defended by resigned institutional buyers on behalf of the powers-that-be.

But this was not the holocaust. That is coming soon to a stockmarket near you. But who's worried?

They only provide the capital that will finance corporate India's investments in the economic growth you dream of. If they collapse, it is only business that will be deprived of its principal means of bankrolling the future.

They only determine the health of the investments, valued at a mere Rs 4,30,000 crore, made collectively by 30 million individuals and institutions. And the small matter of the price you would get by disinvesting the State's holdings in public sector undertakings.

They only devastate the market capitalisation of our corporates, compel foreign investment to pull out--raising the demand for dollars and sending the rupee crashing--and decimate business confidence.

The detonation was louder than any nuclear test at Pokhran ever was. And it is mushrooming into corporate India's worst nightmare. For years to come, they'll call it the Debacle On Dalal Street. Or, the Crash Of 98, which crunched scrips into oblivion, annihilated market value in blunt, brutal strokes, and shattered the fragile vitality of the stockmarkets. And it's coming. In a dozen trading sessions following Budget 98, terrorised investors took a massive 874 points off the Sensex, thinning it by 21.60 percentage points. The index was already anorexic by Budget 98, having shed 975 points since the last peak of 4,322, reached on April 22, 1998. The biggest casualty: a sense-numbing Rs 1,34,800 crore of market value of corporate India--23 per cent of the market capitalisation of the 4,700-and-odd listed companies.

Coming in tandem with the second blood-bath on the East Asian bourses, global downgrades in the country's credit-rating, and a state of the Indian economy alternating between confusion and despondency, this plunge is all set to be the swadeshi version of the Crash Of 29 on Wall Street. Says Ajit Surana, 38, managing director, Dimensional Securities: "The markets were perched on the edge. And everything conspired to bring them down--the sentiments, political uncertainty, and the selling pressure by the foreign institutional investors (FIIs)."

Translated into numbers, the Crash Of 98 could see the Sensex drop all the way to 2,500--or even to 2,000. In the process, the market capitalisation of the 30 scrips it comprises may shrink by Rs 54,648 crore, or 30 per cent, in the first case. And by Rs 80,107 crore, or 44 per cent, in the second. In fact, the collective value of the listed companies could collapse by an incredible Rs 1,71,136 crore. Admits Shankar Sharma, 36, director, First Global Finance: "The bears are here. And they will stay. The factors against a bull market are far too many." His argument, echoed around the country: the fundamentals are poor--and getting worse.

The fault lies in ourselves, and not in the East Asian dominos, or in Wall Street wisdom, or in the payment crisis in the so-called Harshad Mehta-backed scrips. Blame the economy, its management, and the unrealistic expectations that business had built up. When investors drove up stock prices to the April 22, 1998, high, the reason behind the euphoria was evident. Not only did the country finally have a central government, it was led by the Bharatiya Janata Party (BJP), which had promised to uphold the interests of Indian companies and pump-prime the economy out of the recession that it threatened to slip into.

Then came the rude awakening. First, the A.B. Vajpayee Administration exploded hopes of a quick recovery by conducting five nuclear tests, immediately shrouding corporate India in a pall of global uncertainty. No amount of bluster in the corridors of power could camouflage the fact that the sanctions imposed by the US and other countries would bite into business' revival prospects. Worse, the economic managers of the country demonstrated clearly that they had no strategy for containing the fallout.

That left Budget 98 as the last hope. And Union Finance Minister Yashwant Sinha, 60, dashed them by delivering a protectionist package which ignored a simple fact: corporate India has been taking advantage of dropping Customs duties to shop globally for lowest-cost inputs, in the process increasing its import intensity to a high 40 per cent. Naturally, higher tariffs would translate into bloated costs, hurting rather than helping the cause of business.

Having calculated its costs, an aghast industry desperately petitioned Sinha for second thoughts, and he promptly obliged, creating a tax-and-tariff framework that not only left many companies none the wiser about whether they had gained or lost, but also provoked deep doubt about the government's ability to finance its expenditure programme, to keep inflation in check, and to catalyse a recovery. Worse, the government appeared to be a house divided, with its coalition constituents up in arms against the BJP, resulting in a major erosion of the stability factor. Reading the signs only too well, institutional investors, both Indian and foreign, decided to withdraw before their portfolios collapsed--triggering off the Crash Of 98.

And, in the process, shaking to the core the foundations of a recovery. For, it is the capital markets--both primary and secondary--that must be the major source of money today for companies planning to invest in growth. With the bears on the rampage, the chances of getting a tumultuous response to a public or rights issue--which has to be priced low in any case--are practically nil. Indeed, the stockmarkets occupy the centre of a spiral of disaster. Today, it reflects the investor's response to the economy and its future. And the depressed state of the markets, cutting off capital flow to companies, is robbing investors of any hope they might have had of improved corporate performance.

Moreover, low stock prices are not only making companies vulnerable to takeover bids, putting further question-marks on their short-term performance, they are also threatening to delay the government's disinvestment programme as the exchequer stalls the sale in expectation of better prices. Sums up Surjit Bhalla, 51, the CEO of Oxus Research--who expects the Sensex to fall to a range between 2,600 and 2,800 in the next three months: "The state of the stockmarkets must concern the government. And it does, statements to the contrary notwithstanding." Indeed, for an economy dangerously close to recession, today's stockmarkets could prove to be the last straw.

A speedy recovery for the economy could, of course, have reduced the Crash Of 98 to a might-have-been footnote, a rogue punter's paranoia of an indiscreet moment. But although the second half of 1997-98 represented an improvement over the first for corporate India--with collective profits rising by 10.4 per cent, compared to 6 per cent in the first six months--1998-99 is unlikely to signal a continuation of that trend. Says Fergus Fleming, 31, managing director, HSBC Securities: "Fundamentally, there is no reason to believe that corporates will improve their operational earnings, or that the finances of the government will get better. We are looking at a value of Rs 46 for the dollar by the end of the current fiscal. And the pressure on interest rates is not expected to bring in foreign portfolio investment in the short term." Sums up Ramesh Kanduri, 50, the president of the Rs 27.99-crore Hinduja Finance: "The economy is a worrying factor. And doubts exist on how long the government could last. Given these circumstances, the market could go down well below the 2,900-3,000 level."

Factor out the fuel, and it is easy to see how the engine could stall so badly. Having driven much of the price-rise on the bourses since they were allowed into the country in 1991, the FIIs are, suddenly, threatening to become conspicuous by their absence. And their withdrawal will accelerate the advent of the Crash Of 98. Indeed, after gaining from the global drift of investible funds towards the emerging markets of Asia, East Europe, and South America, India is now suffering from its membership of that club. Adds Hina Shah, 39, chief investment officer, JM Capital Management: "The world is bearish on India. Almost all the closed-end India funds that used to be traded at their Net Asset Value (NAV) or at a premium to their NAV are now quoting at a discount between 20 and 25 per cent."

The reason? Emerging markets constitute El Dorado no more: the real action is back in the mainstream of the US and Western Europe. All over the emerging economies, markets are collapsing: for instance, the three worst returns in dollar terms over the past 12 months have come from Indonesia (Ä89.4 per cent), Malaysia, (Ä72.6 per cent), and Korea (Ä72.4 per cent). By contrast, the top performers were the stockmarkets in Italy (89.4 per cent), Portugal (74.1 per cent), and France (49.9 per cent). As investors pull the plug on emerging markets, therefore, India cannot but be at the receiving end. Predicts Ravi Mehrotra, 35, chief investment officer, Kothari Pioneer Asset Management: "In the short term, I don't expect FII money coming in. Their main concerns are inflation and interest rates, given the high budget deficits. Superimposed on the Asian crisis, this will keep the markets jittery."

An added reason: being the most liquid among the Asian stockmarkets, India offers the best opportunities for selling to meet redemption requirements. Observes Gul Teckchandani, 41, CIO, Sun F&C: "Selling on the Indian bourses is often on account of factors beyond the country's control." Adds James Marshall, 43, head of research, UTI Securities: "Although India is a defensive market, it is not a sufficient reason for propelling along the bourses when other emerging markets are falling. And if China devalues the yuan, we could see another bottom."

Also clanging the alarm bells are the ratios between the number of scrips that gained and those that lost--the so-called advance-decline ratio. Between January 1 and June 1, 1998, it hovered between 1.64 at its lowest and 3.67 at its highest. But then came Budget 98. And the ratio shifted immediately into a different gear, dropping as low as 0.19, and achieving a best of only 0.57 thereafter. Adds investment analyst Deepak Mohoni, 43: "Average daily volumes have been falling too, and the lowest figure since Budget 98 was touched on June 10, pointing towards a panic-induced bottom."

Unfortunately, North Block chose to intervene, not strategise. One June 8, and then again on June 16, the Unit Trust of India (UTI) and the Life Insurance Corporation (LIC) stepped in to reverse drops of 199 and 180 points, respectively. Lifting the Sensex by the scruff of its neck by using the money-muscle of the institutions to kick off a buying spree only allowed the state-owned mutual funds to lower its average cost of purchase. Complains Mohoni: "All that the move really achieved was to enable the sellers, especially the FIIs, to sell at a higher price than they would have settled for. It neither altered nor affected the fundamental direction of the market." Adds HSBC Securities' Fleming: "The ban on short selling led to a purely technical rally. It might have been a catalyst for bringing back a few investors who might have thought that the market had bottomed out. They were wrong." Against this macro-economic backdrop, BT canvassed the views of the technical analysts who study market movements closely for patterns that predict the future, and disclosed several routes that lead to the Crash Of 98.

STOCKCAST-I: DESTINATION 2,730

The speed is ominous. There's an important indicator in the sheer pace at which the Sensex fell by 633 points from the pre-Budget 98 level of 3,794, ruthlessly decimating every support that could have emerged. According to theory, this acceleration has to ease off with the penetration of the previous low of 3,164, enabling the index to float rather than sink. The probable level of support? One answer is available by applying the Elliott Wave Theory, which posits the formation of triangles whose vertices stand for a peak or a trough. The first of these, at 2,713, was the December 6, 1996, low, while the second, at 4,605, was the August 6, 1997 high. The next stop, according to C.K. Narayan, 40, technical analysis consultant, Apple Finance Securities: "On June 15, when the Sensex swung below the earlier low of 3,164 to hit 3,152.96, the third wave of the decline began. It should culminate in a range between 2,630 and 2,730." Or, between 1,592 and 1,692 points lower than the previous peak.