Mumbai: The stock market has recovered smartly in the past five trading sessions. Since 22 August, the S&P CNX Nifty, the 50-stock benchmark index of the National Stock Exchange (NSE), has regained almost half (45%) of the nearly 12% that was eroded from its peak of 4,620.75 reached on 24 July. The index has gained 6% in the past five sessions to 4,321. In the case of the Sensex, the 30-stock benchmark index of the Bombay Stock Exchange (BSE), more than 50% of its losses have been recovered in the past five trading sessions.
The recovery hasn’t been restricted to large-cap stocks. BSE’s mid-cap and small-cap indices have also recovered sharply at 41% (of losses) and 44% (of losses), respectively.
Meanwhile, rollover of outstanding positions in the derivatives markets has been healthy and the advance-declines (number of shares that rose to number of shares that fell) ratio has improved.
Besides, volatility in the markets has come down from 35-40% to 24%, according to a measure of this put out by the NSE and open interest, or the number of outstanding contracts that are held by market players at the end of a trading day, has gradually inched up.
While the easing of fears of a political crisis helped, the rally has also got to do with the upturn in global equities. MSCI’s World Index has risen by 2.3%, thanks to the liquidity-easing measures taken by the US Fed, the European Central Bank and the Bank of Japan. Since 21 August, Hong Kong’s Hang Seng Index has risen 7.5%, South Korea’s Kospi has gained 5.4%, and China’s Shanghai Composite Index 4.8%. Markets in the US have recovered as well. Shankar Sharma, vice-chairman, First Global Group, says this indicates that things will get better.
A 27 August report by the First Global Group says: “if you don’t get the money into the market immediately, you will miss the incremental bull run of staggering proportions.” The report argues that law of diminishing marginal utility is at work for the stock markets across the board, wherein the first set of negative news about the subprime problems in global markets has caused panic. These comments are based on the firm’s quantitative research models.
Not all experts share First Global’s optimism. Ambareesh Baliga, vice-president of Karvy Stock Broking Ltd says that the worst is over, but only for the time being.
“The panic which had set in due to the subprime problems in global markets has been addressed to some extent as central banks have stepped in with monetary support. Secondly, on the political front, the issue is somewhat settled for now. Markets have taken cue from these developments,” he said. However, Baliga says, he doesn’t think that the Sensex will touch a new high quickly and that it is likely to consolidate around the 14,200-15,200 levels for some time.
At the same time, it is unlikely that markets will touch any new lows until the quarterly results season sets in October, says Nilesh Shah, managing director and chief executive officer, Envision Capital Advisors Pvt. Ltd.
The recovery was also fuelled by foreign institutional investors who have invested nearly Rs2,000 crore in Indian stocks since 21 August and taken net long positions worth Rs3,500 crore in futures. “It’s the leveraged traders and institutional investors who have led this rally so far; retail investors are not coming in a big way,” Shah says. Ketan Malkan, vice-president, HNI (high net worth individuals) desk at India Infoline Ltd, a Mumbai-based stock broking firm says: “Although new investors haven’t entered the market, existing clients have increased their stock holding by 20-25%. Some have even started booking profits on the stocks they bought at recent lows.”