Are they heading for doldrums?

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Fundamentals & technicals are words of the past, it’s the sentiment that is driving the market back & forth now, say Manish K. Pandey & Gyanendra Kashyap

It hasn’t been long since January 10, 2008 - the day when the Indian benchmark index Sensex touched its lifetime high of 21,206. The Sensex, many predicted, could easily cross 25,000-points mark, in no time, as the bull moved ahead with rampant optimism. Nothing seemed to bother it. But a deep cut of 1,408 points (the biggest intraday fall in the history of Sensex) on January 21, 2008 and the raging bull was at its knees. The morose pessimism could be seen among the investors too as the Sensex dropped to an appalling low of 15,332 the very next day (on January 22, 2008). And since that day it’s nothing else but skepticism, ambiguity and apprehension that’s ruling the market along with bears. The result - Sensex crashes by over 27% (since January 11, 2008) with almost every major listed company losing anything between 30% and 40% of their market capitalisation till date (March 25, 2008).

From fears of a recession in the US to Reliance Power mega issue (that sucked out a whopping $180 billion from the market), from rising inflation to escalating commodity and bullion prices, from heavy selling done by FIIs to anything and everything under the sun, got its share of the blame. But with domestic factors largely been taken care of, as of now, the market doesn’t seem to stabilise. Then what’s it now, if it’s none of these? “Skepticism is still there” says Satish Kannav, Senior Analyst, Arihant Capital Markets. “Certainly it will take time before confidence returns,” he adds on. So is it sentiments that have taken over all fundamental, technical and economical factors? Yes, to some extent (or should we say totally).“Market is driven by fundamentals but behavioural science puts premium to sentiments. While long term fundamentals become hazy, shorter term risk aversion increases. Naturally we are seeing this extremely negative sentiment in the market,” agrees Amitabh Chakraborty, President (Equity), Religare Securities. “90% sentimental, 10% fundamental,” another Delhi based analyst sums up the current swing in a simple phrase.

Let’s look at some recent examples to have a fair understanding of this so called ‘bear’ mindset of wary investors. On March 17, 2008, as the news filters in that JP Morgan is buying the beleaguered investment bank Bear Stearns for a mere $2 per share ($270 million in total) – a price which is about 15 times less than its ongoing trading price in the stock markets – the Sensex tanks over 951 points. The very next day the US policy makers further slash the Fed rate by 75 basis points (bps) and the Indian bourses bask in the glory of the same next week. “Greater integration of Indian markets and the economy through increased capital flows has made the Indian market more susceptible to global cues. So it may not be wrong to infer that global factors especially the US subprime led fears of a global recession have been the key reasons for this increased market volatility,” avers Sachchidanand Shukla, Economist with Enam Securities.

Well, blame it on the ‘foreign hand’ if nothing else. It is evident that despite all the brave talk on our part of robust and sustainable growth rate, domestic money et al, the foreign institutional investors (FIIs) still remains the most important driver of our markets as they account for 17% of the total equity turnover. So, it’s them that seem to face the obvious brunt. Questions put forth to a cross section of analysts reveal that the FII pullout has been at the main reason for the more than often bloodbath at the bourses. If we look at the numbers, their claim seems logical. For the month of January and March this year, FIIs net investments in the Indian stock market stood at a negative Rs.130.35 billion and Rs.22.76 billion (till March 25, 2008) respectively. So it’s this bunch of shrewd investors that seem running the market as of now (or always!).

But then, in the past, there have been several occasions when FIIs sold but the domestic investors ensured that the indices went up. For instance, on October 23, 2007, FIIs pulled out a massive Rs.12.1 billion, but the benchmark index rose by 4.9%. In the same way Federal rate cuts too haven’t had a consistent impact on the bourses. The latest being the rate cut on October 31, 2007 which took the Sensex down by 0.5% instead taking it up as it’s now. The same is true with the domestic issues too. On February 11, 2008, the Sensex crashed by 834 points on inflation worries as it went past 4%. However, it was the same indicator which stood firm when inflation was hovering around 6% during March last year.

The reasons are simple. “Over the last few months the markets have been plagued by a slew of bad news, both domestic and international, which has unnerved a lot of investors. Further, the events have also increased the confusion with respect to the direction that the markets would take hereon and hence it’s not surprising that they are reacting to all this and are becoming more volatile,” explains Hitesh Agrawal, Head, Research, Angel Broking. But then an imminent yet persistent question naturally crops up – how long and at what levels?

“We would be happy with about 12-13x forward Price Earnings (PE) multiple, given the extreme pessimism in the market. That brings us a range between 12,350 and 13,300 in short term. Longer term, fundamentals should prevail, and a 15-18% CAGR from a base of 13,000 Sensex probably takes us to 30,000-level in 3-4 years time,” says Chakraborty with great optimism. Although there is no way to foretell when the sentiment will turn but the ongoing bear phase has definitely made the valuations more realistic (PE, which was pegged at 27.67 at the start of 2008, has come down to 19.16 as on March 18, 2008). So, it shouldn’t come as a surprise if one sees the bull back in action shortly. But until then, let’s dance to the bear tune.

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Source : IIPM Editorial, 2008

An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).

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