Investors rushed to sell stocks on Friday, pulling down the Sensex, the Bombay Stock Exchange’s (BSE) benchmark index, 3.43% or 541.7 points, and taking their cue from the Dow Jones Industrial Average (DJAI) that fell 311.5 points on Thursday.
The Dow fell on fears that higher corporate borrowing costs would curb the rapid pace of takeovers that has been driving stocks up, and that a slowdown in the mortgage market and rising defaults in subprime loans would trigger debt defaults and impact corporate earnings.
The Sensex closed at 15,234.57, making it the fourth largest loser among Asian indices. The Taiwanese benchmark index, which shed 4.22%, was the biggest loser in Asia in percentage terms. The Korean Kospi was down 4.09%, while the Philippines’ index lost more than 3.85%.
In absolute value, this is the fourth largest fall in the Sensex, and destroyed Rs1.55 trillion worth of investors’ wealth. BSE’s market capitalization came down from Rs45.96 trillion to Rs44.41 trillion in the process.
However, some foreign institutional investors (FIIs) remained unfazed by the selling frenzy. According to data put out on the website of the capital market regulator, the Securities and Exchange Board of India (Sebi), foreign funds used this opportunity to buy stocks. They were net buyers to the tune of $60 million (Rs242 crore) on Friday. Since the beginning of July, FIIs bought $6.2 billion worth of Indian stocks net of sales. In the first seven months of 2007, they have pumped in $10.53 billion in Indian markets.
Anthony Muh, executive director at Alliance Trust Asset Management, said the decline is unlikely to be the beginning of a complete meltdown, but is rather an adjustment to increased risk. “Yet again, this time around the downtrend may prove, in hindsight, to be a good buying opportunity for investors on a longer time perspective,” he added.
There are many takers for Muh’s view. Deepesh Pandey, deputy chief investment officer, Mirae Asset Global Investment Management (Singapore), said that “this seems to be more of a short-term panic reaction because of concerns in the US markets. Fund flows should come to emerging markets as there is no concern on the fundamentals of these markets.”
The Asian indices took their cue from the drop in the US and UK markets on Thursday, owing to an increased perception of risk and the fear of a credit crunch. DJAI ended down 311.5 points at 13,473.57, while the S&P 500 was down 2.3% at 1,482.66. UK’s 100 stock FTSE index lost 3.15%. On Friday, DJIA opened at 13,472.68 and was trading at 13,407.57 at 9pm India time.
A senior executive at a multinational brokerage in India, who did not wish to be identified, said that he expects the market to make a recovery within the next few trading sessions.
“We have seen massive inflows from FIIs this month. It is very unlikely that they might suddenly reverse their roles,” he added.
Andrew Holland, managing director of Merrill Lynch in India, said the volatility in emerging markets would be very high in the next few weeks and pull down the Sensex in the short-term. “However, the markets will soon recover from this global impact,” he added. Holland said that Friday’s crash has nothing to do with domestic corporate valuations and attributed it to the rise in risk-aversion among global institutional investors.
Richard Ensor, managing director of UK-based Euromoney Institutional Investor Plc, which has investments in India, says: “It is a tough time to make any long-term calls. But the selling is triggered off by the revaluation of risk and India is going to be very much part of it.”
The plunge came a day after the International Monetary Fund (IMF) revised its growth estimates for the global economy.
The fund forecast global growth of 5.2% for both 2007 and 2008, up from the 4.9% growth for both years it had predicted in April.
It revised its estimate for China’s growth in 2007 from 10% to 11.2% and India’s from 8.4% to 9%. Significantly, while releasing its update, the fund had said that risks in global markets had increased and singled out defaults in sub-prime loans in the US as an example of such risks.
Joshua Felman, senior resident representative of IMF in India, said that “a rise in risk-aversion is what pulled down markets across the world.”
Felman identified the slump in the US housing market and the failure of a pair of leveraged loan sales as the two major triggers that led to the crash.
“A pair of loan sales, funding private equity houses for two leveraged buy-outs (LBOs)— that of Chrysler in the US and Alliance Boots in the UK—failed to attract investor interest,” he said.
“In 2002, the deal multiples were not more than about 2.5 times the Ebitda (earnings before interest, tax, depreciation and amortization) of an LBO targetfirm. However, this had risen to about six times in the recent period. Today, we have seen the burst of the LBO boom,” he added.
The trouble began to brew early this year in the US sub-prime market, said Felman, charting the events that led to the crash.
“The fall in the market was an outcome of the threat that was brewing over the past few months,” Felman said. In the past three years, the level of risk-aversion had declined very badly.”
Rachna Monga of Mint, and Bloomberg reporters contributed to this story.