It was August 1987 when the US markets achieved its then all-time high at 2746.65 points for the Dow Jones Industrial Average. But the next two months witnessed the biggest all round selling in the stock market history. A selloff in the markets which was triggered from the Hong Kong markets had spread like fire to the rest of the countries in the world and US also could not save itself from the burns. By the end of October 1987, all the markets in the world had fallen anywhere between 40 per cent to 80 per cent.
Why are we discussing this when Indian markets are on an upswing?
We are doing this because there is a lot of similarity in the events that happened before and after the crash. Even the reasons for the crash and the way it all cascaded are also something which is identical.
Experts said in those days that the main reason for the 1987 selloff in the stock markets was the use of electronic trading systems and use of computers. Our comparison starts from here. If we look at the selloff which started in India in February 2008, it was also due to this factor. It was Bear Stearns who went bankrupt in the US and investors sold off all the stocks they held in the portfolios. This selloff can be termed as basket selling or program trading. An order to selloff a huge quantity is entered which makes the stock prices fall till the complete quantity is sold. And as you must be knowing that stocks which trade in the futures and options segment do not have any circuit limits means they can rise without stopping for the whole trading day and can fall till they go down to zero.
The selloff first started in Asia and later shifted to Europe and Pacific regions before reaching the US. The same happened with India in 2008. The selloff due to subprime started off in the US and slowly moved on to UK and European markets. India was safeguarded compared to US due to which this initial selloff did not have much impact on our markets but with the Bear Stearns selling and big guys knowing about the global meltdown coming in everybody wanted to liquidate and then slowly and steadily selling started. This was all amidst the finance minister and the prime minister coming on business channels literally every day to convince people as to how India was insulated from these risks of subprime.
But as the US markets kept falling with handful of banks failing every month, India also gave way to the pressures. The cascading effect of negative news weighed on the already loss making positions which retailers, HNI’s and even institutions held on in the futures and options segment. It was the first time in the Indian derivative market history of eight years that market players witnessed a fall of more than 60 per cent on the Nifty and more than 75 per cent on select stocks which traded in this segment.
This selloff in the US was after a rally in the overall markets for five long years, the same as happened in India.
After the selloff the government was fast to act on the developments and recently announced a lot of measures to help the economy. This paid off and the markets saw themselves bouncing back slowly and steadily. The Dow Jones Industrial Average after making of 1616.21 in October 1987 started to move to close up by more than 60 per cent in the exact next one year. Today, in India we have had the Nifty making a low of 2252.75 in October 2008 and now one year later it trades at over 5K. A gain of 128 per cent in one year for the markets amidst a lot of fears and with virtually zero participation from the retailers.
Today, we know that the rally which we have observed in the Indian stock markets has been led by the foreign institutional investors. Many of them are the same ones who were investors in the American markets in those days 22 years back. The Indian investors or the domestic institutional investors in India today have not seen the actual life in those days and that is the reason they failed to see an opportunity in the selloff in 2008.
If we believe that the economy is nothing but a cycle of things happening, then after a recession the development has be to the same as historical. The time required by things or developments and the magnitude at which things happen will surely vary because of the change in the mediums and advancement of technology.
The best part is that the American markets which started to move after this crash of 1987 though went through small corrections on it way but went up to make a high of 11908.50 in January 2000. So it means that a recession is a blessing in disguise for the market players who decide to look at this venture intelligently.
If this has to be true then this comparison tells me that the Nifty has a long way to go. Chances of the markets witnessing a short-term correction cannot be denied. So it means approximately near 6000 levels which were the all-time high levels for the Nifty it could face resistance and witness a bit of selloff. The reasons could be anything for that matter and if the stock markets survive then the Nifty has to head high.