Mar 04, 2013 05:19 PM IST | Source:

Is Indian equity market moving towards 'Lost Decade'?

Japanese economy used to be envy of the world in 1980s. This was reflected in Nikkei which touched all time high of 39000 in 1989.

Vivek Sharma
Financial Planner and Trainer

Japanese economy used to be envy of the world in 1980s.  This was reflected in Nikkei which touched all time high of 39000 in 1989.  But end of 80s marked the end of era of great growth that Japan had seen. Contrary to a thriving economy in 1980s, Japanese economy slipped into a phase of recession and even now i.e. after 25 years Nikkei continues to trade at 30 percent of all time value and is currently around 11400. Japan’s downfall which started in 1989 deepened further till year 2000 was termed as lost decade. The lost decade which impacted Japan has started haunting many western economies of the world including US and UK.

Will it hit India also? As far economic growth is concerned, it looks unlikely as of now but in terms of stock market movement, the lost decade seems to be a threat which cannot be ruled out. It is pertinent to note that in January 2008, the Sensex reached all time high and since then the market is yet to breach that limit, though more than five years have passed. These five years have been a period in which the broad based index Sensex has created no value for investors. For a passive investor, who would have invested in 2008 in the index would be left with no value creation even after passing of five years.  There is no doubt that some specific stocks have performed and have given good healthy returns, both Nifty and Sensex have given negative returns during last five years. But is worrisome is that India has seen good growth over a period of 5 years post 2008. In spite of reasonable growth, the performance of stock market has been very disappointing.

What are indicators that are hinting at arrival of lost decade in Indian stock market? We have completed five years of nil growth in the broad based market. It is extremely likely that in the next five years the stock market may not grow further. People may scoff at this idea but there are certain factors which cannot be overlooked. First, Indian economy continues to be heavily dependent on global economic scenario. The internal growth of the economy may not be sufficient to propel stock market growth which means that we continue to depend on global factors for rise in stock market. If US, UK, Japan and other leading economies continue to remain weak, there is no reason to deny the fact that we will continue to remain weak.

On domestic front, our banks have started feeling the pinch of slowdown in economic growth. Nonperforming assets of banks in India is on rise and has already started hitting public sector banks. Though the regulator is watching it, but the fact remains that this will have impact on the growth of business in India with banks showing unwillingness to fund growth. This may further propel slowdown of growth in Indian economy.

On deficit front both internal as well as external, there are causes of concern. Fiscal deficit continues to rise which is propelling inflation and on balance of trade front our performance has become extremely unfavorable which has hit currency value.  Real estate which has till now remained insulated from default risks may gradually started experiencing default by both builders as well as those who have borrowed money to buy houses as job losses are feared now. Deteriorating economic conditions along with poor global economic environment provides good enough reason to believe that we may be reaching a phase of lost decade in Indian equity market.

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