The 60,000 Cr Crash

Praveen Gupta, 54, is mighty miffed. A stockmarket veteran, Gupta had always prided himself on being a cautious investor-the kind with 50 per cent stock, 40 per cent bonds and 10 per cent cash in his portfolio. With wife and three daughters, Gupta felt at home with solid, safe blue-chips. But last year, something happened to break Gupta’s 20-year-old habit.

NASDAQ hit the stratosphere. NASDAQ-listed Infy and Sify were quoting at 100-150 times premium on their BSE prices. He thought local stocks had to follow the US lead. He topped his portfolio with the Silverlines, Sierra Optimas and Visualsofts and, instead of booking profits, he held on. Then on Tuesday, April 4, Gupta and hundreds like him lost hundreds of crores. "Damned if you don’t buy IT. And damned if you do," he mutters.

What a crash that was! One new economy stock after another hit the lower circuit breaker, investors turned to non-IT stocks for profit-booking, mutual funds offloaded on selling pressure. There was simply no exit route. By the end of the day, investors were poorer by a whopping Rs 59,500 crore!

What triggered the crash? Several factors:

NASDAQ, for one. Wall Street gurus like Mark Mobius of Templeton and Abby Cohen of Goldman Sachs had warned against an impending correction. Then, the US justice department ruled against Microsoft in the anti-trust case and NASDAQ slipped 7.6 per cent.

On the domestic front, fiscal year-end profit-taking had already created a downtrend. Expecting redemptions and dividend outflow, mutual funds were converting stocks into cash. Then came the news of the I-T department sending tax notices to FIIS for misusing the Mauritius treaty. A carnage followed, with a Sensex slide of 361 points.

The questions everyone is asking now: what was the logic that drove the market down? Has the technology bubble burst? Will the old chips make a comeback?

Throw a dart at a wall of market experts and you’ll be surprised at the different answers to a simple question. Says Jayesh Shah, director, HSBC Securities: "The bubble has burst. There’s a reverse momentum and technology stocks are close to bottom. But that’s not to say they won’t resume on a positive trend. Much will depend on quarterly results, management perception, order positions, acquisition plans, foreign tie-ups and other company-specific events." Adds Tushar Shah, director, kbs Securities: "The same people who were pushing the stocks on their way up are bringing them to ridiculously low levels. There is no sanity."

Many see in this a good opportunity. Says Dilip Matgaonkar, chief investment officer at Prudential-ICICI: "When investors are selling indiscriminately, it creates the right opportunity to pick up quality stocks. There will be selective buying and the ensuing rally will be much more broadbased. Stocks in cement, auto-ancillaries and banking will stage a good comeback."

And yes, most still think IT will still be the prime mover. "There’s a basic logic driving market value. IT is where growth is. During the past decade, technology output has been growing 40 per cent against manufacturing’s 3 per cent. Valuations will then naturally follow growth," says a fund manager.

Any which way you look at it, the crash was paradoxical. First, the correlation of NASDAQ with the Indian bourse is irrational. While the former is primarily built up with new-born dotcoms with no revenue model or hardware companies struggling with falling per-unit prices, many of the local IT companies are service-providers making profits from export income.

Second, the FII tax story was a non-issue. The demand was a measly Rs 9 crore, while FIIS themselves pumped in Rs 432 crore into the market on the very day notices went out. "When the market is in the mood for correcting itself, any news can trigger it," says kbs’ Shah.

The good news: fundamentals are strong. Production of cement and commercial vehicles and tax collection is up, interest rates and inflation are down. Also, India dovetails with the global infatuation with new-age stocks. Was the crash then another false alarm? The magnitude leads many to believe it will be a watershed of sorts. "It will create a healthy platform for future growth. People were buying anything. That will change. Selectivity will be important," says Matgaonkar. Sure enough, over the next two days investors were buying heavily into Infosys, Digital Equipment and Wipro. Infy was up by Rs 600 in 48 hours. Many also see a revival of stocks like L&T and Gujarat Ambuja, which spells a healthier recovery.

Most important, rationality may return. Gupta and his ilk may tread with caution again. The lesson of Black Tuesday: don’t look for when the market will start to fall apart. The right time for exit is when there’s no fundamental reason to own the stock.