The Hindu Business Line : Worst ever plunge since dotcom crash

The Nifty’s plunge to 3881 levels on Monday’s close makes the 2008 stock market correction more precipitous and vicious than any downfall the Indian markets have witnessed over the past six years. Only the dotcom crash of 2000-01 witnessed a similar erosion in stock values and lasted this long.

The correction that began in early January 2008 has so far shaved 40 per cent off the Nifty’s peak value of 6287 points. In contrast, every previous corrective phase, from 2004, has halted at a 30 per cent decline or even less.

Shallow fall

The corrective phases of January-May 2004 and May-June 2006 both saw the Nifty bouncing off lows, after a near 30 per cent decline in values. Market downfalls in February/March 2007 and again in August 2007 proved much more shallow, with the index recovering after a 15 and 11 per cent decline respectively.

In contrast, the meltdown of 2008 has seen the index down by 40 per cent so far from its peak (if you ignore the short-lived bounce in May). This particular corrective bout, which has been underway for five months now, is also more protracted than any bear phase since 2001. Even the big market fall of 2004 lasted only for four months from January to May.

The only other meltdown in recent stock market history that compares to this one in magnitude is the tech-stock-triggered market meltdown that started in February 2000 and despite short-lived rallies, held the market in its grip until September 2001. When the Nifty bottomed out at 854 points on September 21, 2001, the index had shed 51 per cent off its value, reckoned from peak to trough.

Corrective phase

Another disheartening feature of the recent fall is that it has failed to halt even as the Nifty’s PE multiple has plunged well below its long-term average. Every corrective phase in stocks since 2001 has ended with market valuations settling at a higher level than the previous correction.

The PE multiple at the end of the 2004 correction, for instance, was at 12.8, this climbed to 14.9, when stocks hit their nadir in 2006 and further to 18.6 after the 2007 fall. But at today’s Nifty level of 3881 points, its PE multiple stands at 16.7. This is well below the long-term average of 18 times registered by the markets over a ten-year period.

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