Are Things Different? | Value Research Is the new high more inclusive than the recovery of the past few years? A resetting of indices shows that this time round it actually could be different
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Are Things Different?

Is the new high more inclusive than the recovery of the past few years? A resetting of indices shows that this time round it actually could be different

Around one year ago, there was great rejoicing that the Sensex, after having collapsed from an all-time high, had recovered without the stock markets going into a bear phase. At that time, I'd pointed out that the recovery was somewhat hollow as it was limited to the major stocks that dominate the large-company indices like the Sensex and the Nifty. If one 'reset' all indices to the Sensex' level of 12,612 when it hit it's peak on May 10, 2006, then the other indices were languishing at 9,000-10,000 levels when the Sensex was back above the 12,000 in September. The moral of the story was that smaller companies' stocks had fallen much more than the big Sensex stocks and then had recovered much less.

Now, the Sensex and the Nifty are roughly in a similar situation, having come around from a previous high to a steep quick crash and then a full recovery. But is this recovery just as thin as last year's or (to use a somewhat jinxed phrase), are things different this time? Let's do the same exercise again. The markets hit a high on 8th February, 2007. That day, the Sensex closed at 14,652. After that, in just 16 trading sessions, it dropped by 18 per cent to 12,415. Let's reset six indices-BSE 100, BSE 200, Nifty, Nifty Junior, CNX Midcap and BSE 500-to 14,652 on 8th February and see how they fared. Remarkably, none of them fell much more (or much less) than the Sensex. All the indices were within a range of 12,301 (BSE 200) to 12,456 (CNX Midcap).

The markets did not fall further and after a couple of false starts, the recovery began in earnest after 2nd April. Last week, the Sensex closed at 14,650, just a whisker less than that previous high. So are our 'reset' smaller indices doing any better this time? Remarkably, they are, and by positively impressive margins. In ascending order, the Nifty is at 14,981, the BSE 100 at 15,036, the BSE 200 at 15,087, the BSE 500 at 15,147, the CNX Midcap at 16,182 and the Nifty Junior at 16,978 is close to 17,000. In general, I think it's fair to say that during this period, the broader stock markets have done much better than what is being indicated by the Sensex or the Nifty. The general rule of smaller companies being worse off during volatile phases appears to have been suspended, at least for some time. I think this is great news. There could be many reasons for this-like big stocks were suffering from over-attention earlier-but those are all somewhat overwrought justifications. The simple fact is that whatever is happening to Indian stocks is now broad-based in a very meaningful sense.

Still, that doesn't detract from the fact that we are at a sort of a inflection point. Over the last few months, Indian companies have been living under the impact of a rupee that is strengthening and rising interest rates. The next few weeks will see a spate of quarterly corporate results that will show us how well companies are coping with this twin threat. In fact, just the next week to ten days should be enough to give everyone an idea of how things will turn out. Despite the good news I've pointed to earlier, investors are always nervous at high levels and apt to turn tail at the slightest fright. I think the coming days could be a turning point of sorts and by mid July we will have a definite idea of how resilient this story is.

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