Mumbai: The Sensex dipped, but not as much as the benchmark indices of most markets, the US Federal Reserve added $19 billion in funds by buying mortgage debt, the European Central Bank loaned $83.3 billion, and other central banks in Japan and Australia did their bit to inject extra cash into banking systems on Friday. On a day when too much seemed to be happening too fast, economists downplayed the risk of a full-blown meltdown. And a Citigroup research report said that Indian shares remained the most expensive in Asia (outside Japan) despite a sharp fall in the markets.
Meanwhile, uncertainty prevailed over the real magnitude of the US’ subprime woes and the impact of this on global markets.
The Sensex, the benchmark index of the Bombay Stock Exchange (BSE), recovered towards the end of the day to close down 1.54%, at 14,868.25, after losing about 3.7% during the day. The broader Nifty index of the National Stock Exchange lost 1.59% to close at 4,333.35. Other major Asian markets ended Friday’s trade with sharper losses: South Korea’s Kospi index was down over 4.2%, while the Australian index lost over 3%. Those in Japan, Hong Kong and Taiwan shed about 3% as well.
“Uncertainty” is one word that can sum up the current problem with global markets, says Richard J. Hunter, head of equities at UK-based Hargreaves Lansdown Stockbrokers. “The extent of the credit crunch will not become clear for some weeks yet and, as such, we can expect further volatility. Each piece of negative news will be seized upon, and will perpetuate the global snowball effect,” he adds.
That was evident on Friday, a day after French Bank BNP Paribas’ announcement that it was freezing redemptions on three funds set off a fall in markets across the world: UK’s FTSE index dropped 1.9%, France’s CAC 40, 2% and Germany’s DAX, 1.6%. On Friday, at 10.20 India time, the Dow was trading at 13,211.42, down from Thursday’s close of 13,270.68.
Foreign institutional investors (FIIs) were net sellers of more than Rs742 crore worth of Indian equities, according to the BSE website.
However, they could have picked up selling pace as 15 August, the redemption date for hedge funds across the world, is fast approaching. Hedge funds demand a 45 day notice for redemptions. So, for the July quarter, the application period to withdraw money from a hedge fund is from 1 July to 15 August. There is a strong possibility of people queuing up for redemptions in hedge funds after 15 August.
Sheshadri Bharathan, director, stock broking, at Dawney Day AV Securities Pvt. Ltd, says that this may lead to a “cascading liquidity withdrawal” syndrome across emerging markets. “It has not happened yet, but if does, the stock prices can be under selling pressure across markets where funds have invested,” he adds.
Tim Scholefield, head of equity at Barings Asset Management in London, says that the “uncertainty” in financial markets is heightened by the lack of visibility into subprime loans. “The financial instruments which are the source of concerns are typically not traded publicly, with the result that information on pricing is opaque and often slow to emerge. Investors will remain cautious until a fuller picture of the financial impact of the deterioration in the US mortgage market becomes clear over the next few weeks,” he adds.
Thursday’s prompt action by the European Central Bank to “fine-tune” money markets by providing $130 billion in overnight funds to banks was successful in ensuring that credit markets functioned smoothly despite the increasing caution in the market, says Scholefield.
However, despite Friday’s fall in markets across the world, Scholefield remains bullish on equities. “In the longer term, these factors are unlikely to derail what we believe is ultimately an attractive outlook for global equities. The dash toward industrialization within the developing world shows little signs of slowing, and this has obvious implications for the energy, commodity and industrial sectors which collectively account for a third of the global equity market,” he says.
The Indian market will continue to remain highly volatile because of global factors, says Nilesh Shah, chief executive of the Mumbai-based Ambit Capital Ltd.
However, almost all Indian companies are immune to the problems with the subprime and the high-yield bonds in the developed markets, adds his namesake Nilesh Shah, deputy managing director of ICICI Prudential Asset Management Co. Ltd.
“This is a storm that will blow over,” he says.
(Sarah Thompson of Bloomberg, AFP and PTI contributed to this story.)