Worse may be ahead for the markets

Worse may be ahead for the markets
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First Published: Tue, Jul 15 2008. 11 51 PM IST

Updated: Tue, Jul 15 2008. 11 51 PM IST
Mumbai: India’s most tracked equity indices, the Bombay Stock Exchange’s Sensex and the National Stock Exchange’s Nifty, fell to their lowest levels since April 2007 on Tuesday as fears of the impact of the ongoing credit crisis revisited global markets, triggering large scale sell-offs across world markets.
Both benchmark indices have now lost at least 37% since the beginning of 2008 after a brief recovery early this month. And, analysts say it might take a while for both the indices to “find the bottom”.
Sensex closed at 12,676.19 points, down 4.9%, or 654, on Tuesday. The broader 50-stock Nifty index lost 4.4%, or 178.6, to close at 3,861.10.
Experts attribute much of the value erosion in Indian stocks this year—the point of origin was the mortgage crisis in the US and the subsequent credit crunch after which investors across the world went cold on equity assets—to the continuing sell-off by foreign institutional investors, or FIIs.
FIIs have taken out close to $7 billion so far this year after pumping in around $17.36 billion (Rs74,995 crore) last year. The erosion in market capitalization of Indian stocks this year has been close to Rs30 trillion ($692 billion).
According to some analysts and large institutional brokers, the volume of outflow could intensify, forcing Sensex and Nifty further down.
THE LAW OF GRAVITY (Graphic)
“If equities continue to fall globally, outflow from India could be of much bigger scale,” said a Singapore-based fund manager who has invested in Indian equities through participatory notes, and does not wish to be named.
According to mandatory disclosures made by firms at the end of the March quarter, FII ownership in the 30 firms whose stocks constitute the Sensex was 18%. The total market capitalization of the Sensex stocks on 31 March was $554 billion, of which FIIs owned $99 billion of stock.
Some analysts, however, said other investor groups had contributed to the fall as well.
“The market capital of highly liquid stocks has shrunk far more than what FIIs have taken out this year,” said Ranganath Char, head of capital market products at domestic financial services provider JM Financial Consultants Pvt. Ltd.
Shankar Sharma, joint managing director of Mumbai-based First Global group, added FII outflow has been relatively small compared with the fall in the index.
Selling by Indian retail investors and high net-worth individuals, or HNIs, apart from domestic institutions, has been quite high. According to private bankers, HNIs have pulled out large sums of money from the market early this year. A small part of this money “is now being invested in the markets through equity-linked structured products,” said Samir Bimal, country head for private banking business at ING Vysya Bank Ltd.
Structured products from investment banks offer capital protection as they largely invest in fixed income assets and allocate a small portion to equities.
A prominent domestic brokerage in India, which serves a large number of FII clients, received more than Rs1,000 crore worth of sell orders from such clients on Tuesday, said a dealer who wished to be anonymous.
Like India, markets across Asia fell on Tuesday. Taiwan’s Taiex index, down 4.5%, was the second biggest loser after the Sensex. Hong Kong’s index lost 3.8%, the Chinese index dropped 3.4% and South Korea’s Kospi 3.16%.
Singapore’s Strait Times and Australia’s ASX 200 lost more than 2% each, while the Japanese index was down 1.9%.
With the fall in Sensex, its price earnings (P-E) multiple has come down from 27.67 in January to 15.88. Still, India continues to be more expensive than many Asian and emerging markets. For instance, the Hong Kong and South Korean indices are trading at 12.8 times and 12.1 times earnings, respectively.
Some portfolio fund managers in domestic institutions including mutual funds and insurance firms have started believing that Indian stocks are trading at attractive valuations and are great buying opportunity for long-term value, but dealers in brokerages said there has been very little buying from domestic funds.
A negative outlook on India’s long-term borrowings in local currency to “negative” from “stable” by credit rating agency Fitch Ratings added to the bearishness on Indian stocks.
Ashwin Ramarathinam contributed to this story.
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First Published: Tue, Jul 15 2008. 11 51 PM IST
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