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Markets Can Fall Further...A Brief Pictorial Analysis


TMR Admin
May 3, 2020, 12:12 a.m.

This present market crash triggered by the COVID -19 has been likened by many to the World War - I scenario. The recession to follow will probably have its impact for the next few years. We have heard such statements being made by analysts all over the world.

Despite of all such statements, the markets globally has bounced almost 50-60% from its lows made on 24th March 2020. We have had jubilant images of people rejoicing that the month of April was the highest gain made by Sensex ever in a month. Now when the media is showing us such confusing signals, the experts are bamboozled and the markets seem to have a mind of their own, here is our attempt to look at historic data in order to decipher the way ahead. 

Take a look at these charts. 

THE CURRENT BOUNCE: 

 

Nifty has bounced almost to the tune of 50% from Mar -2020 lows.

The Dow Jones Industrial Average has bounced almost 50-60%  from Mar 2020 lows. But has started slipping from these levels and is moving lower again.

A LOOKAT THE STRUCTURE OF THE 2008 CRASH

As you can see, the 2008 crash in Nifty was also a steep one. After that there was 61% bounce from the interim lows and then the fall continued ,albeit with less velocity in a slightly staggered manner. 

A similar structure was seen in the Dow Jones Industrials in the 2008 crash. There was an interim bounce of 61% followed by a subsequent fall to much lower levels, however the velocity was still quite ferocious. 

 

A LOOK AT THE SUBSEQUENT RECOVERY: 

NIFTY:

DOW JONES INDUSTRIALS: 

As seen from here the markets went to much lower levels from the first interim bounce and eventually the 2008 peak levels were breached in the end of 2013.

Now lets take a minute and recollect the macro-economic parameter changes that were ushered in at that point by the RBI Governor and the Federal Reserve Chairman. Let us see if there are any parallels. 

 

MACRO-ECONOMIC PARAMETERS:

The RBI Governor through a slew of rapid rate cuts brought down the repo rates to multi - year lows. Its akin to the present low rates ushered in by the RBI. 

The Fed Governor then had begun a bond buying program -  Quantitative Easing through which they infused tremendous liquidity in the markets until 2016.  Even in the current situation the Fed has announced lower rates and an indefinate bond buying program.

Now lets look at a few major digressions. In early 2008 crude oil prices had gone to 130$ / barrel after which they crashed to multi - year lows. Crude oil prices are currently also at major multi year lows( even negative for a while). But the crude oil economics at the moment are very very different from those in 2008. 

Even the current state of the Indian banking system is very different from that in 2008. Even before the COVID - 19 triggered market crash, the Indian GDP growth rate was at a multi-year low in 2019. There has been hardly any credit offtake over the past 18 months. Also 2 banks went under water - PMC Bank and Yes Bank. Yes Bank has been bailed out. This is something that had not happened in 2008 in India. Indian Financial Services sector has also been under water since the latter half of 2018, with NBFCs finding it difficult to raise credit. 

Due to this it remains questionable how much impact will the reduction in repo rates benefit the economy this time round. The RBI governor himself has made statements urging banks to transmit the rate cuts to the customers and also to lend to the customers. The recent INR 25000 crore TLTRO that the RBI had offered banks for lending to NBFCs, was bid for only to the tune of INR12850 Crore on  its stipulated date 23rd April 2020. Banks are scared to lend to NBFCs and bail them out. The Indian GDP is slated to grow at 2.5% this year.

Now in lieu with this, its clear that the markets will follow a trajectory similar to the one it did in the 2008 crash and take its own time to recover (P.S. - read long time) unless the Government gives a mega boost to the economy, akin to what China did in 2014! 

THE CHINESE MARKET OVER THE YEARS: 

SHANGHAI COMPOSITE: 

 The chart above shows the Shanghai composite levels. It crashed in 2008, but in 2014 it wasn't able to go anywhere near the highs of 2008. The economy  was suffering badly. Thats when the Chinese economy changed their stance. Their stance moved largely from being the largest  manufacturers and exporters of the world to becoming the largest consumers of the world. Their government encoporated a slew of measures boosting the consumption within their economy. 

Being the only other country having their population anywhere near us, this could possibly be the way out for India in the current economic scenario. See the recovery in the Shanghai Composite from 2014 -2016. India needs huge economic firepower and political will power in order to come out of this current economic slump. 

Otherwise we are left with a slow paced painful recovery that will take many years to form and the markets are most likely to languish with the current state of affairs and a policy status quo. 

 

We leave you with the Nifty chart of the current fall and a cautionary word, that the markets are headed to much much lower levels, even lower than Mar-2020 levels, given the lack of an adequate and brave (drastic) economic stimulus. 

 



hashtags: #latest #economy #nifty #dowjonesindustrialaverage #marketcrash #globalmacros #macroeconomics #technicalanalysis


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