Mkts' recovery unlikely until FY11: CNBC-TV18 model

By Haresh Soneji, CNBC-TV18

The 8-Year itch

Wednesday's recovery was shortlived, it fizzled out in a day. While the mood may have been dampened by the oil crisis, the current slump in the market could be cyclical and this time around it could be the eight-year itch.

Equity bust every eight years

In the year 1984, the country was in a grip of an economic and political crisis. Eight years later in 1992, the markets were rocked by its biggest scam by Harshad Mehta, once again eight years on, in 2000 it was the dotcom crash and the Ketan Parekh scam. In 2008 it's the oil shock. CNBC TV18's eight-year equity cycle model indicates that there is still some more pain left.

Sensex levels every eight years

               High         Lows        Decline (%)

2008         20,873      13,676            35
2000         5,934        3,590             40
1992         4,467        2,476             45

According to the equity cycle study, the market corrects 40% from its peak in about eight years. For instance, the lowest level for the Sensex was back in 2000, when it declined nearly 40%, and the other big fall was in 1992 when the indices actually fell to 2400 levels. After having corrected 40% odd, the equity market then starts building a strong base. This base formation takes 15-25 months from the highs. During this base formation, the market does not correct swiftly but moves in a narrow range. Bottoms form almost 50% from the highs during the consolidation phase.

In 2008, the sensex has already lost 35% in six months from its closing high of 20,800 level. This means there is some more pain left before the consolidation phase.

Time taken for Sensex recovery

1992   27 months 
2000   46 months

So, how long does it take for the markets to turnaround and conquer its previous records? The CNBC TV18 model shows that after a steep and quick correction, there is a consolidation phase. And another 15-27 months for the markets to top previous record highs. This means that it is unlikely to be a quick recovery for the markets atleast until FY11. Supporting the model are weakening global economic and fundemental factors like crude prices, inflation concerns, country's fiscal deficit and a fledging US economy will weigh on the markets and India Inc.

Invest now, reap later

However experts say this may be a good time for small retail investors to start investing systematically and wait for the next boom in the Indian equity markets. The bigger the consolidation phase, the better for small retail investors.