Mumbai: The Sensex , the benchmark index of the Bombay Stock Exchange, has, over the past two weeks, recouped one-third of the losses it suffered since 10 January, but wary investors are still not convinced that the worst is behind them.
At close on Friday, the index had gained 11.5% over the 14,677.24 it plunged to on 18 March, just before the US Federal Reserve slashed its short-term interest rate by three- quarters of a percentage point to 2.25% in the wake of the collapse of the fifth largest US investment bank, Bear Stearns Companies Inc. The Sensex’s level on 18 March marked a 30% fall from the peak the index had scaled on 10 January.
Analysts predict a healthy earnings season ahead when Indian companies start declaring their results for the quarter ended March as well as fiscal 2007-08 (most Indian companies follow an April-March fiscal year). And most of them downplay the impact rising inflation will have on the bourses — at least in the short term. Yet, none is willing to say the market will continue its rally because many of them are of the opinion that the worst isn’t over as far as the credit crisis in the US is concerned.
“We have only seen a small fraction of the loss,” said Joshua Felman, senior resident representative of the International Monetary Fund in India.
Historically, cathartic events have helped markets recover from a deep financial crisis.
A column on HedgeFund.net, a website that provides information on hedge funds, said that “the Bear (Stearns) situation may qualify as one of those events that marks a bottoming in the subprime-related crisis.”
Despite rising inflation, markets staged a strong comeback, wrote retail brokerage India Infoline Ltd in a client note on Friday. “The bulls will hope to retain their hold.”
Most brokerages expect positive news from the earnings season, which will commence on 15 April with software firm Infosys Technologies Ltd announcing its results.
The significant increase in advance tax payments by companies for the fourth quarter has boosted market expectations; the higher tax payment indicates that the companies expect higher profits. Compared with the previous year, the advance tax went up 110%. Nine firms whose stocks are represented in the 30-stock Sensex and which collectively have around 50% weightage in the index have seen an 88% growth in their advance tax payment.
Meanwhile, foreign institutional investors, the largest investor class (by investments) in Indian equity markets, have started reversing their market calls. They were net buyers of $552 million (Rs2,213 crore) of stocks last week, according to Bloomberg, after remaining net sellers for the preceding 10 weeks.
Still, not everyone buys the argument that the markets will continue to rally.
“Sensex is surely marching upwards,” said the managing director of a large foreign brokerage in India, who did not wish to be identified. “However, international markets are still largely opaque with news coming in bits and pieces.”
According to Deepak Lalwani, an India specialist director at London stockbroker Astaire and Partners, global market sentiments will remain negative in the short term. “The worst is not over — US recession stories have further to unfold,” he said.
Analysts do see increasing raw material prices, declining industrial production, mounting inflation and an impending liquidity tightness as factors that can hurt market sentiment in the short run. Yet, the overriding influential factor remains the US. “The key questions are the severity of US downturn, how long it will persist and how big is its impact on global economy,” said a senior economist with an international finance firm who did not wish to be identified.
US investment bank Lehman Brothers Holdings Inc., in its global economic report on Friday, said aggressive fiscal and monetary easing with a 1% terminal funds rate should prevent a deep recession. It said the housing recession is “half-over” in the US, but predicted an across-the-board slowdown in the global economy.
The latest estimate of Goldman Sachs, the world’s largest investment bank, shows funds, banks and brokerages on Wall Street could collectively lose $460 billion in the subprime mortgage collapse — 40% of an estimated $1.2 trillion credit loss facing the global financial community.
“Sensex cannot surge in isolation from the global markets. The best of corporate results will not be enough to keep the momentum of last week going if clarity does not emerge on the impact of the subprime debacle,” said an executive at an Indian brokerage.
The Sensex last week gained 9.2%, its best in five months.
Ashwin Ramarathinam contributed to this story.