Mumbai: Even as brokerages and investment banks predicted a gloomy short-term future for the Sensex—Goldman Sachs sees the Bombay Stock Exchange’s (BSE) benchmark index at 10,000 by the end of December—the index rose by 5.4%, or a little more than 700 points, on Wednesday to close at 13,664.62, a rise that most experts were hard-pressed to explain.
Brokers on Dalal Street claimed the rise was “75%” assisted by short-covering and “25%” by genuine buying. The index had lost 10% in 10 trading sessions leading up to Wednesday. Other analysts said Wednesday’s rise could be the beginning of a short rally. The Nifty index of the National Stock Exchange also gained 5%, or 196.60 points, after falling below the psychologically important 4,000 level on Tuesday. It ended Wednesday at 4,093.35.
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Short-covering refers to the buying of shares to close an open short position. A trader who goes short on a stock agrees to sell it at a lower price than it is trading at, in the expectation that the price will fall. If the price rises, the trader is likely to buy back the stock to cut losses.
However, the prevailing sentiment on Dalal Street was decidedly bearish, with foreign institutional investors (FIIs), who had sold $6.5 billion (Rs28,145 crore today) worth of Indian equities net of purchases till Tuesday, continuing to sell. On Wednesday, they sold Rs668.43 crore of Indian equities net of purchases.
In contrast, domestic institutions bought Rs421 crore worth of stocks net of sales.
UP, BUT CERTAINLY NOT AWAY (Graphic)
“Prices can dive down further, if global sentiments remain bearish,” said Devesh Kumar, managing director of domestic brokerage Centrum Capital Ltd.
Many Indian stocks, particularly those in the real estate and banking sectors, were “oversold”, said Jignesh Desai, head of institutional sales at SBI Capital Markets Ltd, a subsidiary of the country’s largest lender.
In a client note on Wednesday, domestic brokerage India Infoline Ltd warned both investors and traders to remain extremely cautious in this market. “The pullback may not last long,” the note said.
Local sentiment: The Bombay Stock Exchange’s Sensex rose 5.4% on Wednesday even as key Asian indices ended the day in the red. (Arko Datta / Reuters)
Clarity on India’s nuclear deal with the US, which is expected to emerge by the end of this week, could dictate the investment strategy of many FIIs because of the political sensitivity of the deal, said brokers here who represent these firms.
Some hedge funds, including several controlled by Capital International and one controlled by billionaire trader George Soros, bought Indian stocks on Wednesday, said executives at the institutional desk of a top foreign brokerage, who did not wish to be identified.
Capital International has four Luxembourg-based funds and one US-based fund registered as FIIs in India.
Some hedge funds have recently suffered big losses on their India investments. According to research firm Lipper’s hedge fund performance report for May, three India-focused funds rank among the 10 worst performing funds globally.
Hong Kong-based India Capital Fund managed by Jon Thorn tops the list, while two other hedge funds Boyer Allen India Fund Inc. traded on Mauritius Stock Exchange and India Synthetic Warrant fund of the UK-based Stratton Street Capital Llp. are part of this list, which also includes one China-focused fund, two Japan-focused funds and one Vietnam-focused fund.
Many large FIIs are bearish on the Indian index for the short-term. In a recent report, global investment bank Goldman Sachs said it “retains cautious stance and continue to prefer northern Asian markets to India and Asean”.
Key Asian and emerging market indices continue to trade cheaper than the Sensex, in terms of fundamental price valuations, despite the latter losing 33% this year. FIIs, the largest investor group in markets, have been bearish on India for much of the year.
Goldman’s short-term Sensex target is set at 12,600 and the end-December one at 10,000. Other large foreign brokerages such as Morgan Stanley, CLSA Asia-Pacific Markets and Credit Suisse have also taken a bearish stance on the short-term outlook for the Sensex, citing macro issues, both global and local.
Interestingly, Wednesday’s bounce back was strictly local.
Across Asia, key markets such as Japan, Hong Kong, South Korea, Singapore and Taiwan, saw their benchmark indices end in the red.
Meanwhile, greater volatility in Indian shares listed on foreign bourses, coupled with infrequent trading and low market capitalization in these scrips in those markets, has given rise to increased arbitrage opportunities for specialized traders.
Based on closing prices of 1 July, “48 of the 162 dual-listed depository receipts offer arbitrage profit up to 12% if they are purchased in one market and sold in another”, said Shweta Rai, an analyst at research firm Instanex Capital Consultants Pvt. Ltd.
Depository reciepts (DRs) are shares of a foreign company traded on a stock exchange.
In cases where DRs are cheaper than the local shares of the firm, 16 scrips offer average profit potential of 2.01% before transaction charges, if they are purchased in a foreign market and sold in India.
The highest profit can be gained from arbitrage trade on Gammon India Ltd’s global DRs on the Luxembourg Stock Exchange, which if sold on BSE, would offer a profit of 9.42% before transaction costs. Similarly, ITC Ltd shares offer a 4.54% profit and those of Gail (India) Ltd provide an arbitrage profit of 2.87%.
In the reverse case, when local shares are priced cheaper than its DRs, 32 scrips offer an average profit of 3.77% before transaction charges.
Luxembourg-listed Usha Martin Ltd provides the maximum arbitrage potential of 12.15% before expenses, followed by Bombay Dyeing Ltd (10.30%) and Ispat Industries Ltd (9.32%).