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Forced Bear Market in India – Part -1

March 17, 2008

The Sun has finally set in the world’s second fastest emerging economy, India, blame it on the American sub-prime mess. With today’s fall the Long Bull Phase in India has come to an end. Insights from the three big bear markets of the past 15 years should be useful tools for investors if they have to tackle another bear market in the coming months.

The market’s decline phase is usually shorter than the bull market’s rise but post the fall, bear markets witness a protracted period of sideways movement that can be quite painful. There are no predictable patterns in sector performance (i.e., the sectoral winners differ in each bear market just the way each bull market is built around distinct sectoral themes). Bear market rallies tend to be quite powerful, but are meant to be sold and not bought.

This bear market could be different from the previous bear markets in at least one way: We are unlikely to get the extended sideways movement in share prices after the bear market bottom is established. This is because fundamentally India is very different now than what it has been over the past 15 years. This also means that the time scale for any prospective bear market may be compressed compared to the past. However, this does not mean that the decline will be smaller.

Morgan Stanley in a report said, Investors should be prepared for close to a 50% haircut from the top. Based on residual income model, a bear market could take the BSE Sensex to 11022, slightly less than a 50% decline from the top.

In the next part we will analyze the past bear markets and strategies and recommendations for the future.

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