When the Sensitive Index of the Bombay Stock Exchange (BSE) welcomed 1999 by shooting up by over 600 points, it was as if 1998's pent-up sizzle had finally found a way out. As Coopers & Lybrand executive director Sharat Bansal says, The Indian stockmarkets might well have skipped 1998.
The reasons were all there. With Congress refusing to form the government, mid-term elections seemed distant. Mandates like infrastructure development, share buyback and dematerialisation of shares appeared to be on track. Third-quarter results were largely encouraging. And many foreign funds were to get their fund allotments for emerging markets only in January. So, even as the foreign institutional investors (FIIS) were on their annual vacation, the bulls at home decided that enough was, well, enough.
As a result, the Sensexwhich closed at 2963 on December 24touched 3515 on January 11, a gain of over 550 points in 14 working days. On January 8, volumes on the BSE and the National Stock Exchange (NSE) had reached Rs 4,830 crore. On January 11, the volume zoomed to over Rs 5,400 crore.
Says Parag Parekh, a Mumbai-based broker: Typical teji rumours and tips are flying thick and fast, and everybody in the market seems to have become an expert with tips to offer. The entire rally seems to be based on the 'greater fool' theory. Most people agree that a rally is unwarranted at this stage, but there are more people buying stocks at a high price in the hope that a greater fool will buy them tomorrow at even higher prices. At such times, it is necessary for investors to exercise utmost discipline, not feel left out of the rally and not run after every stock in the hope of making a fast buck. It is important to stick with the right stocks with proven fundamentals and better-than-average growth prospects.
As if on cue, the slide began on January 12, with the Sensex losing 80 points, and 43 points more the next day. On January 14, the Sensex ended at 3253, nearly 200 points below Monday's close. To make things worse, the crisis in Brazil following the 8 per cent devaluation of its Real had world markets reeling. Along with New York's Dow and London's Footsie, Indian kerb deals also felt the tremors, with many market favourites having lost substantial amounts. Even the Skindia gdr index shed 5 per cent.
There's no doubt that rumours have again played a key role in the current rally. Says a senior BSE official: Quarterly results have become a regular phenomenon. The company's performance and expectations of a bonus are discussed openly, which spreads across the market. The fallout is the volatile price movement. Says BSE broker Neel Dalal: Technically, the market seems poised for a rally and by end-January the index should be in the 3500 zone. A technical resistance is expected at 3280 levels. But if institutional support comes in as expected, the rally would continue for a longer period. fii inflows in the first week amounted to $20.4 million. Gross purchases were Rs 213.8 crore, sales Rs 127 crore, a net investment of Rs 86.8 crore. The cumulative net investment in dollar terms at the monthly exchange rate stood at Rs 8,670.4 crore as on January 8.
This is far more than the fii inflow for the week to December 25. During the week FIIS brought in $4.4 million to the Indian capital market. For the entire month till December 25, net fii inflow was at Rs 230 crore, which translates into $54.3 million against a net outflow of $172.1 million. The FIIS had purchased equities worth Rs 1,109 crore, while their gross sales were at Rs 765.3 crore.
But addressing the golden jubilee convention of the Institute of Chartered Accountants of India, sebi chairman D.R. Mehta said that the fiis' response and investment in the capital market had been almost static during the past four years$8.6 billion at present against $9.3 billion in 1995.
Yet, a big reason for this rally is the impending fii inflow. Says a dealer at a foreign brokerage: Expectations are that about $100 to $150 million worth of fresh allocations would be made by foreign investors. If this happens, we could see the market rallying to levels of 3,500 points; if it does not, then it's back to 2,800. The market is also anticipating glowing quarterly results from the software and pharma sectors.
Brokers point out that speculators are also cashing in on fears of a liquidity squeeze because of the low volume of demat shares available. According to the ceo of hsbc Securities, Fergus Fleming, foreign investors will now be able to manage their portfolios of demat stocks. These stocks are going to be more attractive for foreign investors as trading in a demat mode has been their long-standing demand. They will be able to switch positions more often now given the safeguards that the depository form of settlement provides to them, he says. Most of the pivotals which entered the mandatory demat trading mode on Monday registered moderate to heavy gains. However, considering that most of them rallied, the fact that the shares went into mandatory demat mode is unlikely to be the single biggest reason for their gains, say brokers. It could at best be one of the reasons.
Another factor influencing the speculators is that budget time is close. Each year, the bulls start shoring up the markets before the announcement of the budget. Then, when it is a week or so away, they slowly start offloading. Depending on the declarations of the budget, the market skyrockets or nosedives. According to brokers, the bears and the shortsellers are also party to it. Even in 1998, the market had reached 3500 levels only to fall after the budget. Says Deena Mehta, BSE director: The market should continue to move up until the budget.
To curb such unwanted volatility, sebi has banned 'all or none' trades, currently practised at most stock exchanges. The decision has been based on the feedback received from the BSE and the nse. It was felt that the segment is being used by operators to include kerb trade transactions. 'All or none trades' is specifically available on the bolt, the bse's on-line trading system, were trades can get matches at a predetermined price and quantity. The field was introduced by the BSE in 1997 to regularise kerb trades. On the bse, the outstanding trades are also made available, which enables brokers to route in the transaction. However, this facility is not available on nse. According to sources, loopholes in the system of reporting and settlement of negotiated deals were also discussed at the meeting. sebi has also introduced a new system where all negotiated deals would have to be necessarily settled in seven days.
Clearly, the recent flash was primarily due to speculation, though the fundamentals appear encouraging at least till the budget. Says Ashok Kumar of the Mumbai-based Lotus Strategic Consultants: The absence of the FIIS and the hesitation displayed by the domestic financial institutions to press sales seem to have given the bull operators the upper hand in the market. The bear operators, whose stranglehold over the market has suddenly loosened, have been badly trapped, especially in the counters of software scrips like Pentafour Software and Satyam Computers. Not for long, though. Profit-booking and subsequent bear operations have indeed stalemated the ongoing war between the bulls and the bears on the Indian bourses.
