Why did SENSEX crashed from 20K to below 10K?

Stocks with exactly the same economic fundamentals were great buys for investing in stocks with Sensex at 20,000; but they are bad investments today with Sensex at some 10000 odd! Is it so?

Had the Sensex been at 30,000 today, we might have justified the level by quoting many facts and statistics. Some of them could have been: The interest rates are on their way down and back to the levels of two years ago. Inflation is down to nearly 6.5%. The rupee is at an all time low of 50 against the dollar. The crude prices are below $50 a barrel.

With the new pay commission for the central government employees and significant pay hike just announced for the PSUs, the urban purchasing power should be strengthening. The year has had its standard quota of monsoon. The last quarter ended fairly well, at 7.5% growth. Nearing elections, the government has been bending backward, easing up on an array of policies. The government has already announced its continuing commitment to invest heavily in infrastructure.

Real estate prices are down to more realistic levels and home loans are headed southwards as well. The worst hit suffered by an Indian bank by the subprime crisis is the ICICI Bank, according to which the hit is a mere $32 million that has been accounted for by the bank. Our foreign exchange reserves remain a healthy $260 odd billion. The Mumbai terror attack has unified the country like never before. Mumbai is on the move again.

But Sensex is not at 30,000. It is closer to 10,000. Not counting the Mumbai terror attacks, which were a later phenomenon, our gloom about the financial crisis is all about the Sensex plummeting below 10,000. So our financial crisis is really a crisis of Sensex rather than any real effect of the subprime related crisis.

Why did Sensex crash from 20,000 to under 10,000 within a year? Not because our economic fundamentals have crashed overnight. Why did Sensex climb from 10,000 to 20,000 earlier in the first place (a question rarely asked)? Not because our economy had performed some unheard of miracle. The Sensex soared because some foreign institutions, with their home markets hardly offering any investment opportunities invested heavily in our market. And it plummeted when they took a big hit back home, needed their money real bad and fast and pulled back their investments. Soon they will have no option but to bring the investment back to our doorstep.

It is strange that when prices fall in general, we are all happy because goods are now better value. But when stock prices fall, we shed copious tears. Exactly the same stocks with exactly the same economic fundamentals were great buys with Sensex at 20,000; but they are bad investments today with Sensex at some 10000 odd!
Source: Economic Times
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