Indian markets post record drops

Indian markets post record drops

Mumbai: Taking cues from US inflationary concerns that roiled most stock markets starting Friday, the Sensex, India’s bellwether share index, on Monday fell 3.84%, or 769.48 points, the second biggest single-day fall in absolute value.

The broad-based S&P CNX Nifty of the National Stock Exchange also slumped by 270.7 points, or 4.48%, its largest single-day point loss.

The Sensex decline alone wiped out Rs3 trillion in investor wealth, when measured in terms of the cumulative market capitalization of all the listed companies. That figured dropped to Rs65,65,338 crore at the end of Monday’s trading, down from Rs68,66,534 crore when the market opened for trading.

Some domestic analysts saw the fall in the Bombay Stock Exchange’s Sensex—which was second in absolute terms since the 826.38-point loss on 18 May 2006—as possibly the beginning of a small correction in Indian equity markets, which have been on a tear this year as well, up around 38.15% for the year at Monday’s close.

A market correction is usually defined as a drop of 10-20% over a short period of time.

“A 8-10% correction is overdue in Sensex," says Manishi Raychaudhuri, executive director of investment research at UBS Securities India Pvt. Ltd, an arm of UBS AG. As a result, he predicts that “foreign institutional investors (FIIs) as well as domestic funds will (only) start allocating fresh capital in January after the correction."

Not everyone is waiting that long, though. Some fund managers and equity analysts see Monday’s dip, where 29 out of 30 Sensex component stocks posted steep declines, as a potential buying opportunity.

“The negative global cues could keep the Sensex low on Tuesday, but we expect short coverings to help the index recover. The market could go down little more from here. But these are great buying opportunities," claims Amar Ambani, head of equity research at India Infoline Ltd, a publicly traded brokerage firm.

The Sensex was the worst hit on Monday among all Asian markets. The benchmark indices of Hong Kong, Australia and Taiwan fell about 3.5% each. Singapore’s Strait Times index was down 3.25%, South Korea’s Kospi down 2.91% and the benchmark Chinese equity index shed 2.6%. Japan’s Nikkei 225 index declined 1.71%, bringing its four-day loss to 5%.

Some market observers had expected Asian markets to fall as the Dow Jones Industrial Average, or DJIA, the benchmark US equity index, fell 178 points, or 1.32%, on Friday, after US inflation in November climbed 0.8% to reach its highest level in two years.

That rise in inflation had triggered fears that the US Federal Reserve could now go slow in cutting the Fed funds rate in 2008. The Fed has cut interest rates by 100 basis points to 4.25% through three stages since September.

Many investors were betting on another 75-100 basis points rate cuts by the Fed next year, leading to greater liquidity flow into emerging markets, including India. Apprehensions that the Fed outlook on interest rates could now be affected by rising US inflation created selling pressure among US investors.

“Inflation could emerge as a real issue. There are already early signs that economic growth and corporate earnings are being eroded by inflation," said Michael Gordon, head of investment strategy at Fidelity International, in a markets outlook report released on Monday.

Still, Gordon seemed optimistic of what that would mean for Asian stock markets. “Given the increased levels of uncertainty, diversification will be essential," his note said. “Investors (in the US) will need to consider traditional ways of diversification—by asset and by geography. Moving away from leveraged asset classes will be important. My view is that Asia is the best place to see market exposure without leverage."

Alok Sama, president of UK-based hedge fund Baer Capital Partners, says US inflation data alone doesn’t automatically explain Monday’s fall across markets. “Traditionally, in the second half of December, equity market volumes are thin because of lower participation (by investors)," he explains. “Therefore, indices could overreact to any trigger."

Sama maintains that despite the inflation numbers, the Fed will have to keep cutting rates, only “more cautiously". He is predicting another 100 basis points cut in Fed rates over the next 18 months.

As for the Indian market, Sama says it is “fully valued" albeit with “great fundamentals". He says the Sensex “could be range-bound in the 18,000-20,000 region till end-December".

In percentage terms, Monday’s fall in the Sensex is not big compared with the fall witnessed in May 2006 when the benchmark index dropped 6.76%, losing 826.38 points. This is the sixth instance in 2007 when the benchmark index has lost more than 500 points in one trading day.

All other major indices on the BSE also posted significant drops on Monday. The BSE mid-cap index lost 3.87% while the small-cap index lost 2.9%. According to provisional data from BSE, FIIs sold Rs2,151 crore worth of stocks in the cash market on Monday, while domestic funds invested Rs226 crore in the market.

Several European markets were also down on Monday. The London Stock Exchange’s FTSE was down 1.71% while the Dax index on the Frankfurt Stock Exchange was down 1.45%.

Over in the US, the DJIA was down 0.65%, or 86.2 points, to 13,253.61 on the New York Stock Exchange in early trading at 8.30pm Indian time.

(PTI contributed to this story.)