Brokers, investors to stay away for some weeks

Bottom for stock prices thought to be near; analysts foresee volatility, but also possible upturn.

The mood in stock markets is of caution after today's massive sell-off, which rattled even the most experienced traders.

According to top equity brokers, investors and traders would stay away from the markets for some weeks, in the absence of any positive cues. However, they also say the bottom for stock prices is near, as domestic markets fell more than in developed markets such as the US in recent months.

The benchmark indices, the Bombay Stock Exchange’s Sensex and the S&P CNX Nifty of the National Stock Exchange fell a little over four per cent during the day, on the back of the crash in US markets yesterday.

However, they recovered over half their losses by the end of the day. The Sensex was down 2.2 per cent and the Nifty by 2.3 per cent at the close. The Sensex was already down nearly 20 per cent since last November, as foreign institutional investors (FIIs) had increased their selling.

Heavyweights such as Reliance Industries, Infosys, Hindalco, BHEL, Cairn India and Sterlite Industries were among 135 companies of the BSE-500 index which were trading near their annual lows.

Brake, not breakdown
The absence of a payment crisis or any margin pressure on brokers has given some respite to domestic markets.

Usually, in the case of such a large fall, brokers would face margin call pressure and a crash in the next session would be inevitable, as several trading terminals would be shut till they deposited more money with exchanges.

Crises could be avoided now, as there were no huge trader positions standing in the futures segment. This is evident by the fact that a rollover in equity futures on the last day of derivative expiry in July was near five-year low.

“Indian markets have only applied brakes and are not actually breaking down. The only worry for our markets is huge selling from exchange traded funds (ETFs) and hedge funds,” said Deven Choksey, managing director and chief executive officer of K R Choksey Shares and Securities.

Provisional data show foreign institutional investors (FIIs) sold stocks worth Rs 1,788 crore. Stock prices recovered during the last few hours of the trading session, as domestic institutions pumped Rs 1,372 crore in equities.

“There are no positive cues in the near future, which will keep the Indian markets highly volatile. But the fall in crude price was good and if inflation shows signs of decline, investor money will be seen coming back by the end of this year. Also, markets will be keenly watching further moves by the Reserve Bank of India,” said Nirmal Jain, chairman of India Infoline.

Abroad
According to Choksey, the ETFs and hedge funds were rushing to return the money to investors, mainly large banks which had allowed them to take huge leveraged positions in equities. Therefore, there was global panic selling.

“There is a belief among large foreign funds that Basel-II and III norms for banks in the US will be soon implemented, before Quantitative Easing-3 (a third round of liquidity pumping), which will push them to improve their capital adequacy ratio. So, ETFs and hedge funds were being asked to pay back and, hence, there was selling of equities globally. The shutting down of legendary George Soros’ hedge fund was a classic example of this,” said Choksey, referring to his talks with large investors in the US.

While 20 per cent of hedge fund money comes from private clients, 80 per cent of their corpus is usually funded by banks.

Meanwhile, US stock futures today turned sharply higher, following a much better-than-expected report showing 117,000 jobs were added in July. The Dow Jones Industrial Average was up nearly one per cent, while the Nasdaq index had gained 0.66 per cent in futures contracts. Today, Taiwan’s Taiex sank 5.6 per cent, Hong Kong’s Hang Seng fell 4.3 per cent and Japan’s Nikkei 225 dropped 3.7 per cent.

Key US indices (the Dow Jones Industrial Average and S&P 500)fell by 5.1 per cent and 4.8 per cent, respectively, on Thursday. About $2.5 trillion were wiped off the value of world stocks this week, according to a Reuters report

Not so sombre
“In India, the markets could consolidate but there would not be a much steeper correction from current levels. The talk of double-dip seems a bit exaggerated by bears. The US job data and the recent sharp fall in commodity prices will change sentiment for equities in a few weeks,” said Kishor Ostwal, managing director of CNI Research.

Nandkumar Surti, chief investment officer, JP Morgan Asset Management, said: “The Indian market reacted in line with its Asian peers, which corrected five-six per cent. If interest rates top out and input costs go down, it will augur well for India equities. In that case, the current levels of markets offer good support.”