2008-07-10 17:21:18 Source : CNBC-TV18
�Remember the definition of a stock that has fallen 90%: one that's fallen by 80% and then halves.�
� Gerard Minack
History repeats itself. It�s just that we don�t give it its due importance. The fact that many Sensex stocks have corrected in line with the 2000 correction validates the point. The 2000 burst was essentially a technology led disaster. Therefore, save the technology counters, many Sensex stocks currently have corrected in line with the correction witnessed during the 2000 correction.
The study checks the fall in stocks when Sensex corrected 40%. The conclusion is evident � when a fall hits the capital market, valuations take a back stage. Period. So all the market gyaan on valuations � how cheap some stocks look and how much value some companies offer for long term investors is all cock and bull. Sectoral selling, affected by drying liquidity and vanishing sentiments, affects stock prices of all companies equally.
There is a pattern in such price erosions as evaluated from the dot com fall. The most aggressive sectors are the earliest to give way. And the likes of real estate and cap goods started to see the first round of correction. Money starts moving to defensives, which see the last leg of selling. IT and consumer sectors are witnessing such trends at this point in time. But, the final leg of the fall will witness selling in counters where there has been some buying or have not corrected significantly.
Look at the table below to get a better perspective.
| Stock movements @ 35% correction | % Change | |
| 2008 | 2000 | |
| ACC | -56% | -69% |
| Ambuja | -53% | -63% |
| Bhel | -47% | -65% |
| Cipla | -9% | -58% |
| Grasim | -57% | -70% |
| HDFC Bank | -47% | -47% |
| Hindalco | -38% | -48% |
| HUL | -16% | -50% |
| Infy | -3% | -61% |
| ITC | -29% | -53% |
| L&T | -49% | -78% |
| M&M | -46% | -81% |
| ONGC | -38% | -60% |
| Ranbaxy | 20% | -56% |
| Rel Infra | -73% | -57% |
| RIL | -41% | -49% |
| Satyam | 2% | -80% |
| SBI | -56% | -47% |
| Tata Motors | -54% | -74% |
| Tata Steel | -34% | -53% |
| Wipro | -19% | -85% |
Are these the lowest levels? Not exactly. Some counters could well correct more. In the dotcom burst phase, counters corrected some 90% odd. So, if you think Rel Infra has corrected some 70% from the top is a good time to enter, it may just correct some more. As Gerard puts in beautifully � �Remember the definition of a stock that has fallen 90%: one that's fallen by 80% and then halves.�
But, one thing is for sure, if and when the next leg of correction happens, the defensives will see price erosion. Simply because sentiments are bad and liquidity is drying. As mentioned, valuations don�t play any role.
Finally, is it a good time to cherry pick? I don�t think so. Don�t be in a hurry. PE deals are down some 33% during the Jun quarter. These are indications of things to come. At this point there is no IPO exit to these investors. So, the equity market is really sluggish. Also, CNBC�s 8-year model shows a long consolidation phase once the market corrects 40% odd. The 25 months plus consolidation and base building could inch the market to 50-55% lower levels from the peak. That means another 25% from current levels. With
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