Over the past few weeks, the Sensex—euphemistically referred to as the country's over-inflated economic barometer—has been hurtling downhill leaving tremors all around in its wake. In a year, the Sensex has shed over 1,000 points. Though it recovered slightly to close at 3,030 on November 24, market pundits are estimating a volatility that could well plunge the index down to 2,700 by the end of the calendar year.
The market appears to be gripped by the bears. While the liquidity crisis, high interest, and the Reliance fake shares—yet another ghost of the securities scam—have all played their roles in flushing the bears out of hibernation, it is the impending election that the bears are awaiting. The rupee fell against the dollar, the banks raised their prime lending rates, money supply got squeezed and this three-pronged attack on inflation had its effect on the stock exchange. Says Govind Bhandari, director, Securex Financial Services (India) Ltd: "The market today has changed drastically. Unlike the bear phases of the past, this time the big players are calling the shots. Mutual funds, for whom the capital market is bread and butter, are competing with the FIIs and corporates who are dictating thephases at the Indian stock exchanges."
A market that is uniquely governed by sentiments has even defied positive corporate results. In a strange twist, the day Telco announced a whopping 232 per cent increase in its half-yearly net profits over the corresponding period the previous year, the Telco scrip fell by almost Rs 10. WhenTisco declared an over 130-per cent rise in net profits for the first half of the fiscal year, the blue-chip scrip dropped by Rs 11. Bhandari says the market is fundamentally strong but technically weak.
"At this moment, liquidity in the Indian economic system is scarcer than water in the Sahara. Worse, the mirage of oases in FIIs is becoming just that—amirage!" says he. Indeed, the FIIs, who were increasingly perceived as the saviours of the Indian capital market, may not have turned their backs on the stock markets, but may have found friendlier pastures. "Additionally, to keep inflation low, the monetary policy has become tighter than a lycra body suit," says Bhandari of Securex.
As if these weren't enough, December being the year-end for a lot of FIIs has also prompted a horde of them to start booking profits. Most of the stock exchanges in the emerging markets across the world are witnessing a profit-booking spree, and indices are down in most. In contrast, most exc-hanges in Europe and the developed market have registered an all-time high. The Dow Jones Index crossed the 5,000 mark for the first time in 100 years. In Europe too, the SMI index at Zurich has also hit an all-time high. Toronto, Madrid, Frankfurt, Paris, Warsaw and Athens have all been showing reasonable hikes in the indices of their stock exchanges.
A panic close to the post-Harshad Mehta crash is creeping in. FIIs—irrespective of their oft-quoted, largely-publicised commitments towards the Indian climate—are running scared or towards the rising markets. Those looking at the country long-term appear to have developed what is being referred to as the Bear-itch. The mantra now is: sell, and if the index slides, sell some more.
The good news is that the lower the index now, the higher may be the possible recovery. If the fundamentals are strong as the Government claims, the rupee should strengthen and liquidity ease. SaysVajpeyi: "My guess is that during the first half of the next calendar year, the situation should improve marginally. Post elections, it should be on the road to normalcy." Bhandari, however, warns: "With interest rates up, call money going berserk and the rupee sliding downhill, the second-half corporate results—which generally are better—may not match the unprecedented performance of the first half."
Meanwhile the black joke What remains beyond dispute is that when the market touches the nadir, that is the time to buy more of the low profit-earning stocks.
