The markets have doubled from their lows in March and it isn’t surprising that traders have finally felt the need for some correction.
Both the benchmark Sensex index on the Bombay Stock Exchange (BSE) and the BSE 500 index have fallen by about 8% in the past six trading sessions. The BSE Mid-Cap Index and the BSE Small-Cap Index, which had risen at a faster pace in the three-month rally, fell more —at 9% and 10%, respectively. Even then, the BSE 500 is 80% higher compared with its lows in early March.
Global markets have declined this week with investors booking profits after the sharp rally in the past three months. In India, foreign institutional investors (FIIs) sold shares worth Rs1,152 crore in the past three trading sessions and took short positions worth Rs3,466 crore in the futures market.
A recent global fund manager survey by Bank of America Securities-Merrill Lynch suggests that there are small signs that the euphoria surrounding emerging markets might have peaked, with 37% of the respondents saying emerging markets are overweight compared with 40% in May. The way FIIs have behaved in the past few sessions seems to back this up.
This graph shows the inflow and outflow of capital by the FIIs. Ahmed Raza Khan / Mint
Besides concerns about the pace and magnitude of the global economic recovery, investors are worried specifically about the Indian markets as well. On one hand, the monsoon rains have been delayed. On the other, rising oil prices are likely to worsen the country’s fiscal deficit, a metric foreign investors watch closely.
According to a fund manager, the fact that the government hasn’t done anything about rising oil prices yet suggests that the fiscal deficit could get much worse in the near future. The most recent data by the Reserve Bank of India on bank credit, however, show that credit picked up smartly in the two weeks to 6 June, which is a good sign.
The trouble is that valuations of the Indian market—as in BSE 500—has risen to as high as 21 times past earnings. This has now tempered down to 19 times, but even then there are a number of stocks which have run away far ahead of their fundamentals.
Mid- and small-cap stocks, for instance, are still 91% and 94% higher, respectively, from their March lows compared with a 75% rise in the Sensex. Also, stocks with relatively high risks, such as leveraged firms, have nearly trebled from their March lows.
It’s not surprising then that Suzlon Energy Ltd was the biggest loser among BSE 500 stocks on Thursday.
Write to us at email@example.com