The events of the past few days have proved once again the dependence of global equities on the US markets. Markets in India have been no exception. The Sensex has fallen and bond prices have dipped with the rise in US bond yields. On Thursday, as US bond yields fell and equities took comfort from soothing remarks in the US Federal Reserve’s Beige book of economic conditions, stocks all over the world followed. But the inflation scare will be well and truly over only if the US consumer price index data on Friday is benign.
That’s why the signals that will come from the Bank of Japan (BoJ) after its two-day meeting on Thursday and Friday are so important. In the last few years, Japan, with its ultra-low interest rates, has become the home of the ‘carry trade’—borrowing in currencies with low interest rates and investing in high-yielding assets—which provides enormous amounts of liquidity to emerging markets. So long as liquidity remains abundant, stocks will rebound after every panic. But if interest rates start rising in Japan, that could mean the last liquidity-producing machine is running out of gas.
The consensus is that BoJ will not raise rates at this meeting. That’s seen from the behaviour of the yen, which reached a four-and-a-half-year low against the dollar on Thursday. That’s good for the carry trade, because speculators gain not only from the difference in interest rates between borrowing in Japan and investing in high-yielding assets, but also from the depreciation in the value of the yen. Japanese retail investors, weary of the low interest rates on their savings, are also parking more and more of their savings abroad.
As for the ‘fundamentals’ of the Japanese economy, these appear to be mixed, with strong GDP growth but little evidence of inflation. But while BoJ is likely to continue the switch in policy from combating deflation to a more normal stance, it is not expected to raise interest rates so soon. Even if it does, spreads will still remain high enough for the carry trade to continue. In short, while rising interest rates may not immediately derail stocks, they are a timely reminder of where the risks lie.
There is no dearth of liquidity in the Indian markets. Vishal Retail Ltd set to raise between Rs110 crore and Rs129 crore through an IPO which coincided with mega issues from DLF Ltd and ICICI Bank Ltd. It ended up with bids worth nearly Rs9,000 crore. That the issue would be oversubscribed was hardly ever in question. The issue amount wasn’t too large, and the pricing was extremely attractive. But hardly anyone would have expected the response to be as overwhelming. Yet, as exciting as they may seem, very high oversubscription numbers aren’t good news for either investors or issuers. A ratio of 69 bids for every share on offer would normally leave issuers with a nagging feeling that they could have easily raised more funds from the market. After all, the grey market premium for the stock suggests that it will list at a premium of at least 50% to the issue price. That’s a large amount of money left on the table.
From an investor perspective, the higher the oversubscription number, the lower the chance of making money on listing. The HNI segment in the Vishal Retail IPO got oversubscribed by 312 times. Most investors in this segment borrow funds to invest in IPOs. With an allotment ratio of only one share for 312 shares bid, the borrowing cost takes away any hope of listing gains. To be precise, Vishal Retail would have to list at about Rs1,000, a 275% premium to its issue price of Rs270 for such investors to even break even.
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