Indian Markets Wednesday Wrap-Up: Goodbye '08

After trading firm throughout the morning session, markets traded amidst volatility during the latter half. While the benchmark indices closed with marginal losses, they captured the emotion (of despair) that ruled the roost during the whole of this year.

The Sensex closed lower by around 70 points, while the Nifty closed lower by around 20 points. The BSE-Midcap and BSE-Smallcap indices managed to buck the trend and closed in the positive. Rupee closed at 48.55 against the US dollar. While other key Asian markets also closed firm, European indices are currently trading positive.

2008 was the year of reckoning for bubbles formed across asset classes. In India, the year began ominously as a much touted IPO listed at an embarrassing opening price. Half way across the world, the signs of an economy in recession were there for all to see. Weak employment data, plummeting house prices, foreclosures and defaults. Soon, investment banks began to tumble like nine pins.

And the nightmare had just begun. As another round of bankruptcies hit Wall Street, the US government was left with no option but to step in. And bailout packages worth billions of dollars were announced in a concerted manner by central bankers all around the world. Several US financial institutions also needed direct intervention from the government. Not all companies (read US auto majors) were as lucky.

Stock markets worldwide fared terribly during the year. While the US declined 36%, Europe was also severely affected. While UK tumbled 35%, France lost almost 45%. It was no different for stock markets in Asia. The emerging giants, China and India, witnessed a precipitous fall, ending all discussions on the much touted ‘decoupling theory’. The Chinese market tanked by 65%, while India lost 52%.

One reason the ‘decoupling theory’ fell flat on its face is the importance of foreign institutional investors (FIIs) in emerging markets. It is no coincidence that the decline in Indian markets in 2008 coincided with FIIs taking out around US$ 13 bn from the system. Mid-caps and small-caps were the worst hit, with the respective indices declining by 67% and 73% respectively.

Amongst the companies forming part of the BSE ‘A’ Group, HUL was the least impacted stock in 2008. In fact, it closed the year with around 17% gains. The reason for the same has been the company’s presence in all categories in the FMCG sector, considered to be the most defensive. The company has strong points such as powerful brands, large product offerings across price points, extensive distribution network, strong balance sheet and strong management made it one of the better-placed companies. Though input costs and competition remained a concern, its restructuring exercise, focus on improvement in quality of earnings, pruning brand portfolio and strong sector potential helped it survive the downward spiral.

On the other hand, the top loser in the BSE ‘A’ Group (from the companies under our coverage) was Suzlon Energy. The company’s stock closed down nearly 84% over its last year’s close. The reasons behind the same include the impact of its highly leveraged buyout of Germany based REpower. Suzlon had resorted to foreign borrowings, thereby strongly stretching its balance sheet. As a result of such, the depreciation of the rupee led to high forex losses which severely dented its profits during last quarter. Apart from issues of the inorganic growth, the company was also questioned about the quality of its products as numerous blades of its wind turbines developed cracks.

Amongst commodities, crude prices were in the limelight throughout the year. It started the year at US$ 95.9 a barrel and went to touch an all time high of US$ 147 in July. Since then, on account of global slowdown in demand, the price has dropped by 72%. Currently, the commodity is trading at around US$ 39 a barrel.

Gold stood out amongst all asset classes, generating returns of 4%. However, these gains were after the wild gyrations in the yellow metal’s price, which touched a high of over US$ 1,000 an ounce in March and currently hovers around US$ 867.

All in all, 2008 was a bad year to be a learned investor, but a good one if you are a learner. It taught us the importance of keeping greed and arrogance under control. It taught us to consider money as a servant, not master. It taught us that there are better things to do in life than worrying about daily stock price movements. It taught us the fallibility of experts. And it taught us the cost of panic.

Now, where do we go from here? Given the grim outlook for the world economy in 2009, it might seem natural to feel fearful. But think again. As Warren Buffett wrote in an editorial in The New York Times, equity markets bottom out before the real economy does. Hence, as we stand at the cusp of a new year, now is the right time to get back to investing…the intelligent way. Stay away from greed and get over the fear factor. Invest within your means. Keep saving - and investing. When the cycle turns, and it will, you will be glad to have pulled the trigger.