How about a Samvat Story since the Global Financial Crisis?

Here is a take on Samvat Returns, Samvat Swings and Samvat Valuations.

Nov 18, 2020 01:11 IST India Infoline News Service

As Samvat 2076 ends and India embarks on a new Samvat 2077, the biggest memory traders and investors will carry with them is the disruption caused by COVID. The pandemic is far from over; at least the lag effects are still lingering. While the Sensex and Nifty are at new highs, GDP growth is negative, inflation is above RBI comfort zone and the IIP has just recovered into positive territory.

In a way, the tumult of Samvat 2076 was somewhat similar to Samvat 2065, which encompassed the Global Financial Crisis post the collapse of Lehman Brothers. We look at how the BSE Sensex has performed over the last 12 Samvat Years since the Global financial Crisis. Here is a take on Samvat Returns, Samvat Swings and Samvat Valuations.

Samvat Returns: How they panned out since the 2008 crisis

Data Source: BSE / Capitaline

One clear trend is that Samvat returns have been generally positive. If you look at the last 12 Samvat Years, only two Samvat years gave negative returns. All other Samvat years gave positive returns. During the positive years, the lowest return has been 7% and the Sensex has returned above 10% in seven out of the last 12 Samvat Years. To an extent, the logic of buying on Samvat seems to work.

There have only been two occasions of negative returns. Samvat 2067 began in Nov-10 and extended to Nov-11. That was when the post-Lehman rally had just peaked out, a series of scams had broken out in India, Europe was entering into a crisis and Indian growth story had begun to slow. The other occasion was Samvat 2071, which began in Nov-14 and extended to Nov-15. This was just after the post-Modi rally peaked in late 2014. Year 2015 was an uncertain year as the US Fed had given the first signals of Fed tightening. Of course, the 104% returns in Samvat 2065, was purely an exception.

Samvat Swings: How volatility panned out since the 2008 crisis

Data Source: BSE

If you recollect the market volatility in the aftermath of the Lehman crisis, you would not be surprised by the 116% swing in the Sensex in Samvat 2065 post the Lehman crisis. That period also saw unprecedentedliquidity infusion and the return of the UPA to power in 2009. But, first a word on how Swing has been measured.

We have considered the gap between the Samvat high and the Samvat low of the Sensex as a percentage of the starting Sensex. What is interesting is that the recent Samvat 2076 which just concluded in Nov-20 ranks as the second most volatile period after the Lehman year. The reasons are not far to seek.

The Samvat 2076 began with signals of slowdown even as inflation was trending higher. Volatility took over after the COVID crisis became public. The subsequent lockdown and the economic stress caused a fear psychosis in markets and the VIX remained above 40 for a number of months during Samvat 2076. Unprecedented liquidity infusion triggered a recovery and added to volatility making Samvat 2076; the most volatile since Lehman 2008.

Samvat Valuations: How valuationsshifted since the 2008 crisis

Data Source: BSE

If returns and risk are two dimensions of the Samvat Story, the third dimension is valuation. We have looked at average Sensex valuations in the month when each Samvat concluded since the Global Financial Crisis. The idea is to see whether Indian markets are looking specifically stretched as we come to the end of Samvat 2076. We have looked at valuations in terms of P/E ratio and the P/BV ratio.

If you look purely in P/E terms, the Sensex looked the most stretched at the end of Samvat 2076 with the P/E inching towards 30X. However, there are two counter arguments. Firstly, major Indian companies in the auto, telecom and PSU Banking sectors have reported huge losses in the last few quarters. That has temporarily made the P/E look stretched. Secondly, Indian corporates are at the bottom of the earnings cycle and so a historical view of earnings does skew the P/E.

What exactly does the P/BV say? The price to book is giving a valuation picture that is the opposite of what the P/E is giving. Compared to a P/BV of 3.99X in Samvat 2065, the P/BV is just about 2.82 in Samvat 2076. There are 2 reasons for this fall. In the last 12 years since Lehman, the pace of capital investment has slackened considerably. Unlike the pre-Lehman period, market valuations today are driven by sectors like IT and FMCG and these are not too heavy on book value.

The truth obviously lies somewhere in between. For now, the biggest bet for Samvat 2077 is that corporate earnings show a serious and sustainable recovery. That would address most of the disruptions caused in Samvat 2076.

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