India fears bear-market phase ahead

The main concern of the markets is that foreign institutional investors (FIIs), which drive the Indian markets, may need to pull out from the country in order to meet redemption pressure at home—a replay of the 2008 slump.

From its 52-week intraday high of 21,108.65 points in November last year, the benchmark Bombay Stock Exchange sensitive index, or Sensex, hit a low of 16,990.91 on Friday, down 19.5%.

The Nifty, the broader market index of the National Stock Exchange, hit a low of 5,116.45 points, down 19.3% from its November 2010 intraday high of 6,338.5.

The Indian markets are barely a few hundred points away from entering a bear-market phase, according to Vanguard Group.

“While there’s no agreed-upon definition of a bear market, one generally accepted measure is a price decline of 20% or more over at least a two-month period," according to Vanguard.

The US economy’s cloudy recovery prospects may push equity markets further down globally, leading to bulk selling of domestic stocks by foreign investors. Money will gravitate to safer assets. Bondholders looking for AAA-rated government instruments may prefer to invest in the paper issued by France, Germany, Canada and the UK. All such capital flows are routed through FIIs.

“India is perceived as a risky emerging market and for such a market the risk appetite of FIIs would be lower than a risky developed market," said U.R. Bhat, managing director of Dalton Capital Advisors (India) Pvt. Ltd. “The concern is if there is any FII outflow due to redemption pressures, our markets may enter a bear market phase."

The top FIIs in India, with an exposure of close to at least $30 billion in Indian equities, are Capital?Group?Companies, HSBC Holdings Plc, Morgan Stanley and JPMorgan Chase and Co.

There are 1,738 registered FIIs and they have 5,958 sub-accounts. In August so far, foreign investors have sold Indian stocks worth $336.74 million, though net investments since January stand at close to $2 billion.

In 2008, FIIs sold Indian shares worth $11.97 billion.

Indian markets are trading at a price earnings multiple of 14 times forward earnings for the fiscal.

This, according to some wealth managers, makes Indian stocks attractive, but the government needs to get its act together on the policy front.

“Indian markets can enter the bear-market phase if the problem of delay in the government’s policymaking processes aggravates," a Credit Suisse Group AG official said, requesting anonymity. “The government has to understand that all markets are cheap at present, and unless the domestic issues are solved at the earliest, foreign investors will not be keen to stay India-focused."

With India’s key indices falling over 15% since January, the threat to primary market issuances will in turn affect the government’s asset sale programme. Out of its divestment target of ₹ 40,000 crore for the fiscal, it has only raised ₹ 1,144.55 crore —from a follow-on public offering by Power Finance Corp. Ltd.

The government plans to raise money by offloading shares in Steel Authority of India Ltd, Oil and Natural Gas Corp. Ltd, Hindustan Copper Ltd, and Rashtriya Ispat Nigam Ltd. In fiscal 2011, it missed a target of ₹ 40,000 crore, raising ₹ 22,763 crore.

As for initial public offerings (IPOs), only 11 firms have filed offer documents with the regulator, while 54 public issues are pending.

This fiscal’s 17 IPOs have raised ₹ 8,325 crore.

In fiscal 2011, 57 Indian firms raised ₹ 46,181.65 crore from share sales, according to Prime Database, a Delhi-based primary market tracker.

“The requirement for capital is huge with government’s planned divestments pegged at ₹ 40,000 crore and private companies have filed for issues worth ₹ 50,000 crore," said Prithvi Haldea, chairman and managing director, Prime Database. “Both are in dire states as the primary market is a subset of secondary markets and the atmosphere is not conducive for issues."

Investors will be watching Monday’s trade to see what the near-term trend will be like.

“There will be a short-term knee-jerk reaction in our markets as there will be a rebalancing of assets globally. Money will move to safer havens and gold will go up," said Vikrant Gugnani, executive director, Reliance Securities Ltd.

Indian markets logged a mean 5% fall over the last week, the steepest this year.

“The Dow theory says if you lose 20% from a recent peak, you enter a bear market. If the Nifty stays below 5,000-odd levels, you are in a bear market," said Vijay Bhambwani, a technical analyst, who expects the index to slip further.

The Sensex ended Friday at 17,305.87 points, the Nifty at 5,211.25.

Bhambwani said there could be sporadic rallies, but with investors waiting to exit at higher levels, there will be stiff resistance for the indices at higher levels.

The tenuous state of the global economy could mean some good news for India.

“The positive outcome of the whole situation is that the prices of dollar-benchmarked commodities will fall, which would help in cooling India’s inflation. Due to the recent downgrades in the US there could be an impact for a few days. On Monday, the markets are expected to be trading sideways," said Rashesh Shah, chairman of Edelweiss Group.

Turmoil in the global financial markets could lead to a possible review of what Reserve Bank of India (RBI) deputy governor Subir Gokarn called the “decisive change in stance" that characterized the last monetary policy announcement and a return to the old regime of the “calibrated" approach.

The central bank had raised interest rates by 50 basis points rather than the expected 25 basis points on 26 July.

One basis point is one-hundredth of a percentage point.

RBI has raised its policy rate 11 times since March 2010 to control inflation. It estimated oil at $110 a barrel when pegging inflation at 7% by March end.

Crude, a dollar-denominated commodity that dominates India’s import bill, has dropped 12.43% from its April high of $124.9 per barrel.

“RBI has time till mid-September to come to get a clear picture on the entire issue," said Indranil Pan, chief economist, Kotak Mahindra Bank Ltd. “For now, it is very difficult to crystal gaze what is in store. But by the time RBI is ready to take a policy decision, everything will be much clearer."

While RBI puts the fight against inflation as being more important than hewing to the growth trajectory, its aggressive stance may get tempered if exports take a hit due to a slowdown in key Western markets and a stronger rupee.

“There has been significant slowdown in Europe and the US and companies exposed to these regions, mostly technology and services, will be affected," said C.J. George, chairman and managing director, Geojit BNP Paribas Financial Services Ltd. “Further, when the rupee appreciates against the dollar, exporters’ profits will be hit significantly."

The US rating downgrade will weaken the dollar and strengthen the rupee, according to the Federation of Indian Export Organisations (Fieo). The rupee hit a three-year high of 43.855 to the dollar in July-end and then weakened to 44.735.

Possible austerity measures in the US will leave buyers with less income, denting exports, said Fieo chief Ramu Deora.

“Garments, handicrafts, leather, gems and jewellery would be the most affected sectors besides IT," Deora said.

In 2010-11, India’s exports to the US stood at $19.53 billion, with imports at $16.97 billion.

How India will be affected by the events overseas won’t be immediately apparent.

“It took five-seven days for the market to really comprehend the gravity of the situation after the Lehman Brothers collapse. This time also we will get to know if there is any impact only after a certain period," said Samiran Chakraborty, head of research India, for Standard Chartered Bank.

Importantly, the experience of dealing with the meltdown three years ago is still fresh.

“Global policymakers have got good experience in handling a crisis, but the question remains whether they have enough ammunition left," Chakraborty said.

anirudh.l@livemint.com

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