A sense of déjà vu

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October 2008: Large-scale defaults on US housing mortgages led to the fall of many global financial giants such as Lehman Brothers, AIG and Merrill Lynch. The credit crisis in the US triggered a fall in Indian stock markets with the National Stock Exchange (NSE) Nifty shedding 53% from 6,136 to 2,885 between January 1 and October 31, 2008.

October 2011: The world is reeling under the impact of debt crisis in a number of EU countries—Greece, Spain, Italy and Turkey. Rating agencies have downgraded large economies, including the US, and banks. Indian markets are again feeling the heat with the Nifty falling 26% from 6,177 to 4,888 between January 1 and October 7, 2011.

This has created a sense of déjà vu. The proximity of the two crises means it is natural for analysts and economists to draw parallels. We flipped through various research reports and talked to experts to get a picture of how the two crises are similar/different. Here is what we found: The rot: The current crisis is a result of some European Union countries failing to repay debt while the 2008 crisis was caused by defaults in US housing mortgages.

“In 2008, it was a liquidity and solvency crisis focused on the private sector, especially the financial sector, while the current crisis is driven by government debt,” says Anoop Bhaskar, head of equity, UTI Mutual Fund.

The debt to gross domestic product (GDP) ratio of Portugal, Italy, Greece and Spain was more than 100% at the end of March 2011. Fire-fighting: In 2008, central banks across major economies extended emergency credit, proposed higher government spending and cut rates to encourage spending.

This time, the scope for such drastic measures is limited. Interest rates are already close to zero in the US and Europe. Moreover, after the stimulus o control the 2008 crisis, most governments are left with little resources to fight the current problems.

“In the previous crisis, the governments had fiscal and monetary fire power, which has already been expended,” says Saurabh Mukherjea, head of equities, Ambit Capital.

HOW IS INDIA PLACED

Growth: India’s GDP grew 8% in the first nine months of 2008 before falling to 5.5% in the December quarter. In 2011, it is grew 7.7% in the first six months.

Fiscal deficit: The central government’s fiscal deficit in 2011 is estimated to be 4.7% of GDP, much higher than the 2.5% in 2008.

Interest rates: Short- and longterm interest rates are much lower than in 2008. Ten-year government bonds are around 8.1% compared to 8.5-9% in August-September 2008. Short-term treasury bills are at 8.5% as against 8.5-9% in 2008.

FII inflows: Foreign institutional investors (FIIs) have invested more in 2011 than in 2008. Till September, the FII inflows (debt+equity) into India stood at Rs 17,664 crore compared to an outflow of Rs 41,215 crore in 2008.

Corporate debt: The average debtequity ratio of BSE 500 companies in March 2011 was 0.97 compared with 1.03 in March 2008.

Valuations: A Morgan Stanley report released on September 30, 2011, says the 12-month forward price to earning of the MSCI India Index relative to other emerging markets in 2011 was 1.3-1.5. In 2008, it fell from 1.8 in January to 1.1 in December.

Investor exuberance: The put-call ratio, which indicates how cautious investors are, is much higher (in the range of .35-.55) in 2011. Between January and September 2008, was between 0.15 and 0.25. A higher ratio indicates more cautious investors.

LESSONS FROM 2008

India not untouched by global crisis: In 2008, when financial institutions in the West were crumbling, Indian financial institutions remained strong. However, the stock markets fell sharply by 60%.“We know from 2008 that even though earnings in India are relatively resilient, stock markets may not be so in the event of a crisis,”says a Morgan Stanley report.

Avoid herd mentality: ‘Buy when others are selling and sell when others are buying’ goes the advice. This is more relevant now as stocks of many companies with sound management and finances are available at cheaper valuations. “A crisis creates the best opportunity to invest. Investors should remember that India has been on a structural growth path for years, notwithstanding some speed breakers,” says Nilesh Shah, president corporate banking, Axis Bank.

What falls will rise again: Between January 2008 and March 2009, major Indian equity indices fell more than 60%. In one and a half years, the markets regained their January 2008 level. This shows that if long-term prospects of an economy are bright, investors can sail through short-term market falls.