Rising investor nervousness, spurred by the appreciating Japanese yen, played havoc on Asian stock markets on Monday with the Bombay Stock Exchange’s benchmark index, the Sensex, falling by 471 points or 3.66%.
Japan’s Nikkei lost 3.3%, and Hong Kong’s Hang Seng, 4%. In India, the yen effect was backed by fears of a slowdown in the US economy after the country said that the number of people unemployed was at a 14-month high.
The US is India’s largest trading partner and Indian software firms, such as Infosys Technologies, which drive the Sensex, derive a large portion of their earnings from that country. The Infosys stock lost 4.6%; the stock of its rival Wipro Ltd, 6%.
The turmoil in Mumbai, and in the rest of Asia can be traced back to Japan. As the yen appreciated against the dollar, and the 15 other most actively traded currencies on Monday, investors who were playing the currency markets scrambled to cover their trades. These investors typically indulge in what is termed a carry trade, borrowing in one currency and investing in another.
In recent months, Japan has been the best market for carry trades because of a weak yen and a cost of borrowing that is almost zero; in seven years since 1999, and after two hikes by the Bank of Japan, the interest rate is 0.5%. The money thus borrowed is usually invested in the respective currencies in markets where the interest rate is higher, or in equities. Preferred destinations include the United States, New Zealand and Australia, for debt investments, and emerging markets such as India, for equity investments. Brokerages in Mumbai say trillions of dollars have been borrowed in low-cost yen for deployment across money markets, stock markets, and even real estate markets across the globe and that part of the money flowed into India, too. Several currencies depreciated, and international gold prices declined as investors rushed to exit their investments in other asset classes. India’s rupee dropped the most in 10 months and was at its lowest level since December 20, at Rs 44.64 to the dollar.
With the yen rising, investors who play the carry-trade market are discovering that the exchange rate no longer works to their advantage. “There is a rush to sell securities into which the borrowed fund has been deployed, leading to the present crash across global markets,” said an executive with a brokerage in Mumbai. “Investors are moving from high-risk assets (equities) to low-risk ones,” added Manish Thanawala, director, Greenback Forex Services. No one has any idea of just how much money is involved in the yen carry trade, how many times this has been leveraged through complex derivative instruments, and where it has been invested. Analysts claim that the last time such a situation arose was in 1998 and that it was responsible for the collapse of LTCM (Long Term Capital Management), a US-based hedge fund.
With Monday’s fall, the Sensex has declined 15.7% from its peak of 14723 registered intra-day on February 9. Dilip Bhatt, director at Prabhudas Lilladher, a Mumbai based brokerage said it could fall some more: “Maybe the domestic market has to endure some more pain.” Currency analysts expect the yen to appreciate for at least two more weeks.
Foreign institutional investors, who turned net sellers last week (beginning February 26) after a gap of nine months -- they took out $833 million in five trading sessions between 26 February and 2 March—continued to be net sellers on Monday as well.
While some analysts and brokers are worried about what Monday’s trend could mean for the Sensex over the next few weeks and months—“There aren’t enough deep-pocketed investors in India to keep a crash at bay should FIIs pull out,” said a broker who did not wish to be identified—others, such as Deven Choksey, CEO of K R Choksey Securities, labelled it a “knee-jerk reaction”. “I think people are much too perturbed about the global fall. This fall is largely to do with negative fundamentals in those economies. After today’s fall we are quoting at forward PE (price earning multiple) of 15 and this makes us reasonably valued. It’s much more favourable situation, similar to what we saw in 2003,” said Choksey referring to the beginning of the period that saw the Sensex soar. Sangeeta Purushottam, head, institutional business, Religare Securities, recommended buying at this level. “The markets have bottomed out. It is time to start putting some money into the market,” she said.
Technical analysts did not agree with Choksey and Purushottam and predicted a weak market ahead. “The market broke and closed below the 200-day moving average of 3,647, which is a sign of weakness. We expect the market to move further down in the next few days. The next support level for the Nifty is 3,420,” said Rajesh Maniyal, a technical analyst with brokerage Emkay Shares. The Nifty, the index of the National Stock Exchange fell 4% to 3,576 on Monday.
(Hindustan Times’ Ranju Sarkar and M.C Vaijayanthi contributed to this story.)