Mumbai: A pall of gloom spread across world equity markets and investors dumped shares as Germany sparked fresh fears about growth derailing in Europe by banning short sales on some instruments. The benchmark Bombay Stock Exchange index, the Sensex, plunged to a near three-month low on Wednesday. Fund managers see volatility continuing, but are divided on the direction.

Graphic: Paras Jain / Mint

India VIX, the National Stock Exchange’s volatility index, jumped 20% on a day the 30-share Sensex shed 2.77%, or 467.27 points, to close at 16,408.49, a level last seen in February. The broader 50-share Nifty lost 2.89%, or 146.55 points, to end at 4,919.65. The slump in Asia and Europe came on news that Germany had banned naked short sales of euro-denominated government bonds, and naked credit default swaps of these bonds. Naked short sales means the sale of a product without owning or borrowing it.

“The bearish view has started and the Nifty has breached the 200-day daily moving average of 4,990," said Yogesh Radke, technical analyst at Edelweiss Capital Ltd.

However, he cautioned that “the markets aren’t moving on India-specific factors any more and everything is dependent on global cues" and one “shouldn’t read too much into support levels".

Hong Kong’s Hang Seng Index shed 1.83%, while Indonesia lost 3.69%. In Europe, the FTSE lost 2.18% in early trades, while Germany’s DAX shed 2.39%.

European markets have been in turmoil since Standard and Poor’s cut Greek debt to junk in late April and downgraded ratings on Portugal and Spain. Though they were momentarily cheered by the near $1 trillion (Rs46 trillion) bailout package for the euro zone, fears on growth sputtering has made investors risk averse and seek safety in gold and US assets.

A Bank of America-Merrill Lynch survey of fund managers showed on Tuesday that risk appetite has fallen sharply and emerging market allocations are being cut as Europe flounders and China’s efforts to combat overheating threaten world economic growth. Foreign investors in India have pulled out some $987 million this month, reducing net purchases to $5.6 billion till date this year.

“It’s not running purely on fundamentals, but in tune with global events," said N. Sethuram Iyer, chief investment officer at Shinsei Asset Management Co. Ltd, which manages some Rs222 crore of investor wealth. “While we don’t have any precipitated problems in Europe, investors are still concerned about the debt-to-GDP (gross domestic product) ratios of countries there."

Greece has debt to the tune of 130% of its GDP, while other European nations facing trouble, such as Spain and Portugal, are running debt well over 60% of their yearly economic output.

To be sure, there are some fund managers who wouldn’t blame European woes alone for the sharp fall of 7.2% in the Sensex this month.

“Markets have been challenged by valuations for quite some time now. So they haven’t been able to handle incremental bad news," said Vetri Subramaniam, head of equity funds at Religare Asset Management Co. Ltd, which manages some Rs13,829 crore in assets. “Europe is a significant trading partner not only in terms of imports and exports, but also for world economic growth."

The Sensex was trading at 17-17.5 times the estimated earnings for the current fiscal a month ago. Now, after the slip, it’s come down to 15.8 times, closer to the long-term average.

Some fund managers see an opportunity in the crisis.

“Our economy is doing well, the key variable for us from a global perspective is the oil price, and if a weak global economy leads to lower oil prices, on balance it is positive for us," said Prashant Jain, chief investment officer at HDFC Asset Management Co. Ltd, which manages Rs94,703 crore.

According to Jain, the markets are fairly valued. This implies “over the medium to long term, returns should be in line with growth rates, that is, around 15% per annum".

Kayezad E. Adajania and Ashwin Ramarathinam contributed to this story.