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The Markets continue to wobble. Option traders are still making money. Note we told money and not Wealth. As usual we continue to remain focussed and bring to you the final part of Man made mis-doings of Markets.
The Internet Bubble –
It happened in the year 2000 across the globe main culprit being the US. The dotcom bubble occurred in the late 1990s and was characterized by a rapid rise in equity markets fueled by investments in Internet-based companies. During the dotcom bubble, the value of equity markets grew exponentially, with the technology-dominated NASDAQ index rising from under 1,000 to more than 5,000 between 1995 and 2000. The 1990s was a period of rapid technological advancement in many areas, but it was the commercialization of the Internet that led to the greatest expansion of capital growth the country had ever seen. This sparked all the young budding entrepreneurs to start their own internet related services to profit from the internet boom. All these internet companies were backed on the basis of viewership’s in other words the number of hits/page traffic. What all they lacked was, revenue generation model. No companies/investors were interested or bothered about the revenues. Although high-tech standard bearers, such as Intel, Cisco, and Oracle were driving the organic growth in the technology sector, it was the upstart dotcom companies that fueled the stock market surge that began in 1995. The NASDAQ index peaked on March 10, 2000, at 5048, nearly double over the prior year. Right at the market’s peak, several of the leading high-tech companies, such as Dell and Cisco placed huge sell orders on their stocks, sparking panic selling among investors. Within a few weeks, the stock market lost 10% of its value. Dotcom companies that had reached market capitalization in the hundreds of millions of dollars became worthless within a matter of months. By the end of 2001, a majority of publicly traded dotcom companies folded, and trillions of dollars of investment capital evaporated. The effect was felt in Indian markets as well. Sensex touched 3700 points in the early 2000 and settled down to 1600 points in the late early 2001. US markets fell by 89% and Indians markets did fall by 50%+.
One interesting company I wanted to share about is, “Sycamore Networks” formed by the brother-in-law of “Narayana Murthy of Infosys fame”. Sycamore was not even able to stay on ground for 14 years, the business collapsed and its market cap dropped from the peak of $40 billion during the bull phase of tech bubble and lost 90% of its market cap post the bubble and few years later the same was delisted from the Nasdaq.
The Sub-prime issue and Emerging markets drawdown –
It happened in the year 2008 across the globe main culprit being the US & emerging markets. After the dot com bubble and twin tower attack, the US economy plunged into deep depression. The interest rates were aggressively reduced from 6.5% to 1% between 2000 & 2003. Goldman Sachs issued a report in 2003 stating that the BRIC nations will be the new leaders of global economy; this triggered the global investors to invest in the emerging nations. It stated that China will be the leading economy surpassing the US and India would take the third position. Alongside, US was going into deep depression with rising debt & falling growth. Money started to flow into emerging nation’s stock market and on the other hand US housing market started to move up as the banks and lending institutions started to provide loans without any major security. Therefore, people started to buy more homes on loans with less security to take advantage of the rising prices to sell off later at profit. Homes became a commodity rather than a necessity. As the interest rates dropped down, lenders started giving loans asking for verified assets with self-declared income only. Whereas the initial lending process was, proof of income & verified assets. Later, the lenders started giving loans only with verified assets and no income. And the last leg was even terrible, the lenders started to provide loans to people just based on credit score with no job, no income & no assets. The Sub-prime lending started to become popular. Mortgage business did grow from 7.4 to 23.5% between 2002 to 2006. As the housing boom was accelerating, the federal reserve sensed a recession and increased the interest rates aggressively from 1% to 5.5% between 2004 to 2006. Rise in the interest rates had an negative impact on the house prices. As the loans were issued on floating rate, the debt service capacity reduced significantly. In the year 2006, the housing prices started to move down post the super normal run-up. With falling prices, people were forced to pay out the loans immediately. In cases were the borrowers were not able to repay, the banks were forced to sell the house and make money out of it. This further brought down the home prices. And later there were no buyers and only defaulters. This resulted in a big financial jolt. Fannie Mae, a big mortgage loan underwriter forced to continue sub-prime lending to sustain the growth as it did in the previous years and one fine day from $50 billion market cap, with lending the company collapsed and filed for bankruptcy. This was the start of the financial sectors downturn. All the companies with poor lending had their underlying assets (Loans) has now become NPA’s in a short time. This resulted in a cascading effect, and almost all the small finance companies were on road. On one fine day i.e. Sep’15 of 2008 the big guy Lehman Brothers filed for bankruptcy and the entire financial system of the US collapsed. By start of 2009, there were nine million people without Jobs (6% of population). This forced all the American based investors to pull out their money from emerging markets and across the globe and deploy it back at their home to safe guard their companies from going bankrupt.
Through this series we did got to know some of the economic downturns happening around the globe and how far the world has fared. Of all the downturns, our generation has witnessed the IT & Housing bubble, how it did affect our lives and the economy. Let us now look at our very own markets, how it did do pre & post downturns.
If one closely look at the BSE sensex graph, it is clearly evident that in the long run markets did well irrespective of the downturns. Sensex during the start (Year 2000) of IT bubble touched a new high of 6000 and settled down to 3000 in the year 2001 once after the bubble burst. Similarly, in the start of 2008 our markets did touch 21000 points driven by emerging markets Bull Run and when the US economy started to collapse our markets crashed to 8000 points in October 2008. Markets crashed by 60% during the period creating a heavy sell off in the markets and fear mongering in everyone’s mind. People went bankrupt. Those who ran off selling all their holdings on losses never returned fearing stock markets are not a safe bet for their money. However, today the BSE Sensex benchmark index stands at 35000 points, which is 4.5 times up from the low of 8000.
The important point to note here is. People should not shy away from the downturns thinking markets or economy will collapse and never regain. Instead a long-term investor should think really long and should stay the course. People who used the opportunity of these down turns and deployed more cash in the crashed market are now minting money.
In the end, what all you need is the patience, courage to hold and sticking to your goals.
Signing off with this famous Buffet quote –
” Be fearful when others are greedy. Be greedy when others are fearful! “
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