The turn of global events in the last couple of weeks has shaken equity markets around the world. The Mecca of global free enterprise had its premier stock market record the biggest single day fall in history during this week. Experts are comparing the current situation to what was seen during the great depression of 1920s.
Speak to traders and brokers on Dalal Street, and memories of the tech boom, and bust, are now legion. They have not forgotten the heady days when the Sensex first touched the 6000 mark on February 11, 2000. Those were heady days as the Sensex peaked at 6150. They have also not forgotten the bear market that followed, which tested the patience of the most seasoned among them. The Sensex fell down to 2840 levels in October 2002. The times were bad and, profits, and hope, were missing from the street.
Turn back the clock and remember the excesses seen during the Internet boom. Internet stocks that had no revenues were commanding astronomical valuations. Anyone, and his uncle, who could muster an idea to start a website, suddenly became hot property. Investment bankers threw caution to the winds and, suddenly, the future looked more rosy that the present. The promise of revenues, and profits, looked more exciting than actual profits.
While the Internet dream was being chased around the globe, the Indian markets were not untouched. And it was not a question of the average person, without proper understanding, running after the Internet dream. Investment bankers and fund houses alike just could not have enough of the Internet stocks. Companies repositioned themselves as Internet-enabled and had fund managers chasing them for a piece of the action.
The market value of Internet companies, whether they were profit making or not, shot through the roof.
Heard that story before? Lets talk about 2008, with a little change in the names of the entities that had stretched business logic to the extreme. But the excesses were nothing less than extraordinary. Real estate companies managed to buy chunks of land at just about every nook and corner of the country and wanted to be valued on the basis of “land bank”. The word “dotcom” of the Internet era was replaced by the land bank that these companies had.
Investors were not confirming if it was possible to make profits by just buying land. Realty companies were happy spinning of companies with each project they launched and selling equity to global investors, who were willing to buy the India story. India was being sold at the turn of the last century with the promise of a 250 million strong middle class, and, as India became a $1 trillion economy in 2007, it had only become easier to sell the India story.
With such a strong demand, realty companies suddenly decided to load new kinds of costs on their customers. In Mumbai, the most profitable geographical area for real estate companies, nearly 35-40% of the super area of flats was being used for the common area. Builders found innovative ways of charging customers and real estate companies sprung up all over the country, just like Internet companies had mushroomed in 2000. Excesses, would you call them?
Excesses always led to a correction at the marketplace. Some global companies were wiped out while others like Lucent, AT&T, Nortel saw their market capitalization fall by nearly 90 per cent. In 2008, realty companies have lost 80 per cent or more of their market capitalization in the market meltdown. And it looks that the market is in a mood to further punish the realty companies.
Perhaps, that is where most of the similarities end.
The global financial system was very much intact, despite the 2001 market meltdown. Liquidity was not at a premium as it is now. Banks were not hesitating to lend to potential customers, like they are right now.
US Fed funds rate had fallen to 1.5 per cent a little after the tech bubble burst. In comparison, while the market is beginning to expect a cut in rates, the rates are still at 2 per cent. The supremacy of the US dollar has been dented and there are voices emerging from different parts of the world, calling for a fresh look.
It was the Internet stocks that had caused the hype. And later, telecom companies had faced the wrath of the market. The other sectors may have been impacted but there was no crippling effect on their functioning in the market. So, only a small part of the market was severely impacted during the sell off.
In 2008, the foundations of free market have been severely hit. The market is now talking whether the case of saving the day for Fannie Mae and Freddie Mac or even the rescue of AIG was a case of privatizing the profit and nationalizing the losses. In fact, some also called it the United Socialist State of America! While the drama pans out in the US, Europe is now struggling with five banks already having been rescued by the regulators in the EU area.
The worst, it appears, is yet to come.