The whizkids of Wall Street have converted this practice into a debt wish. They bought these loans from banks, repackaged them into securitised debt products called collateralised debt obligations (CDO), and sold them to investors. Before the sale, however, the bonds had to be rated and credit rating agencies gave them investment grade ratings, which in hindsight were perhaps not warranted. Again, in hindsight, investors who bought the CDOs are being termed ‘too greedy’. And as money managers told their investors that the CDOs in their portfolios were, in hindsight, all but a glossary, panic set in. And beyond all this hindsight lies a foresight: over the next few months, expect lawsuits to follow.

But what do ACC, Reliance Energy or Hindalco, the biggest losers on Nifty on August 1, have to do with CDOs? The answer: uncertainty. But does uncertainty mean that the underlying companies that comprise the various indices like Sensex or Nifty are going to stop their profits streak? The numbers say no — as the first quarter results show, net profits of 1,654 companies for the period April 1, 2007 through June 30, 2007 are up 39 per cent, compared to 32 per cent in the previous year. This is on a lower sales growth (19 per cent versus 29 per cent), implying productivity gains, and despite rising interest costs, which have grown 45 per cent compared to 25 per cent.

If companies are doing fine, is it that in a fit of irrational exuberance investors have pushed up prices to unsustainable heights? Possible — PE multiple of Sensex, even after being beaten down 841 points in just four trading sessions, is still over 20 times, way above most developed markets (UK’s and Germany’s 13, France’s 16) and emerging economies (Russia’s 11, Brazil’s 14, Indonesia’s 16), but close to Taiwan’s 21, and Japan’s and Malaysia’s 23. As I have argued earlier, the relatively higher valuation for Indian equities is nothing to worry about as it is backed by globally above-par corporate performance — with just six companies in Fortune 500, corporate India is still to attain global scale.

... contd.