Bear phase not over; small-cap, penny stocks are the worst hit

Bear phase not over; small-cap, penny stocks are the worst hit
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First Published: Fri, Feb 01 2008. 12 44 AM IST
Updated: Fri, Feb 01 2008. 12 44 AM IST
Mumbai: Although the Bombay Stock Exchange’s benchmark index, the Sensex, has risen 919 points from the level it plunged to on 22 January, the day that it crashed 10% and hit the lower circuit within minutes of opening, the broader market continues to be weak.
One out of every five stocks in the BSE-500 index continues to trade at below its closing value on 22 January. The BSE-500 index covers 500 largest firms, based on their market capitalization.
This indicates the persisting weakness in stocks and the fact that the quest for the bottom of this bear phase is not over yet, said brokerages. They also said that investors who tried to buy stocks when they fell on 22 January, have lost money.
The situation isn’t very different for the exchange’s mid-cap stocks (or those with medium market capitalizations). “Many mid-cap stocks are continuing the drop in their prices,” said Amar Ambani, head of research at India Infoline Ltd, a domestic financial house. “While the large-cap stocks have made some recovery, other stocks are still deep in the red,” he said. The BSE-500 index also includes some mid-cap stocks.
The small-cap and penny stocks are worst hit by the continuing bearishness in the market. “Most of the penny stocks are continuously hitting lower circuit,” Ambani said. He pointed out that the small- and mid-cap stocks had been badly hit by the unwinding of open positions in the futures market, where margin calls had led to severe selling pressure. Adding to this was volatility in the Indian market, that led to higher margins.
The margins on index and stock futures are based on ‘value at risk’, computed on a daily basis, with volatility as a core factor. Traders are finding it difficult to take fresh positions on the derivatives market as brokerages have started refusing part-payments for trades, fearing further increase in margins that have already moved up from 25% to 40-80%.
However, after the derivative expiry, the derivative trade has picked up, said analysts.
An analyst with a foreign broking firm pointed out that typically the large-cap stocks recover first after any meltdown. The small-cap stocks are relatively illiquid and, therefore, fall harder. Domestic brokerage Khandwala Securities Ltd said the trading volumes are very low in mid- and small-caps, and “it will take some time before money trickles down to these stocks”.
Among the BSE-500 stocks, Himachal Futuristic Communications Ltd has lost 30% of its stock value since 22 January. Other major losers include Everonn Systems India Ltd, Geojit Financial Services Ltd, Rashtriya Chemicals and Fertilizers Ltd and Reliance Industrial Infrastructure Ltd. All of them lost between 25-20%.
The BSE-500 stocks that gained substantially include Rajesh Exports Ltd, which soared above 58%. Essar Oil Ltd gained more than 50%.
However, these stocks are exceptions and overall the sentiment is weak. “These are tough days for investors,” said Sameer Narayan, head of equities at ABN Amro Asset Management (India) Ltd. “Value investing is the way forward.”
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First Published: Fri, Feb 01 2008. 12 44 AM IST
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