Impact of Global Fin Crisis

8/14/2019 Impact of Global Fin Crisis

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Karvy Stock Broking Ltd. 1

Impact of Global Financial Crisison the Indian Capital Market

by

Shomesh KumarHead, Equity DerivativesKarvy Stock Broking Ltd

Dec 13,2008


2/14


The Beginning

High growth rates across the countriesin the world.

Lower rate of interest (until 2004 in the

US) causing rapid increase in credit asmortgages becomes more affordable.

The situation led to an increase in assetprices causing a housing boom across

the globe.


3/14


The Beginning

Fuel, metal and subsequently othercommodity prices started to risecausing high inflation.

Un-ethical banking practices and poorregulations fed bubbles in housingmarkets.

To curb the rising inflation, US Fed

started increasing interest rate post theyear 2004.


4/14


The Beginning

Subprime borrowers started defaultingunder the pressure of rising interest ratesforcing banks asset quality to decrease

significantly. The mortgage lenders such as New

Century, Argent and Countrywide were thefirst among the causalities.

The crisis extended to the banking sectoras the banks started breaking down.


5/14


The Beginning

Freddie Mac and Fannie Mae were bailedout by the US government.

The crisis extended to the stock

markets.

JPMorgan Chase and the federalgovernment teamed up on a bailout of

Bear Stearns.Lehman Brothers filed for bankruptcy.


6/14


The Beginning

Merrill Lynch was bailed by the Bank ofAmerica.

Morgan Stanley and Goldman Sachs

convert themselves into Federal BankHolding Companies.


7/14


Impact

The U.S. financial crisis has had itsreverberations on both developed anddeveloping world.

The impact of global financial turmoilhas been felt particularly in the equity

markets across the globe.


8/14


Impact

P e r c e n t a g e R e t ur n s in c e

- 6 0

- 50

- 4 0

- 3 0

- 2 0

- 10

0

Percent(

%)


9/14


Impact

Foreign investors have left the Indianmarket in droves, selling off $9.6 billionworth of shares in the first nine months ofthis year to cover up the losses.

It is a sharp reversal of last year's recordinflow of $17.2 billion into the Indiancapital market.

Some analysts predict that the finaloutflow for 2008 could reach $13.5 billion.


10/14


Impact

The cumulative market capitalisation ofIndian shares, which was $1.8 trillion in January, has slumped even more

dramatically to $760 billion. The valuation of assets held by themutual funds saw a significant decline.Lackluster inflow of fresh cash has

further added to their woes


11/14


Impact

Even new schemes, launched in therecent past, have failed to attractinvestors, which seems to have left the

industry struggling for funds.With most of the economies on thethreshold of recession, the EPS and thegrowth rate is expected to decline

significantly, propelling the lowervaluations for the stock.


12/14


Impact

Capital expenditure plans have beenplaced on the back foot with marketsreeling under severe liquidity crunch.

Outlier scenarios entailing falling incomesand double-digit unemployment arecreeping into the picture.

The confidence among the investors

community has taken a severe beating.Revival might take longer time periods.


13/14


Impact

The volumes traded declined significantly toRs40,000 crore from over Rs1,25,000 crore.

To ease the cash squeeze and spur economicgrowth, the RBI cut the SLR, the CRR and the

repo rate.The meltdown has reduced the availability of

international capital both in debt and equity.


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Thank You

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Impact of Global Fin Crisis