VR Logo

Humpty Dumpty Had a Great Fall

Attack on America proved devatating for Indian equities -- driving the market to its low in 8-years with a 19 per cent decline, the steepest fall among all markets.

Indian stocks tumbled as the war fears and diminishing FII inflows continued to terrorise the markets. Despite a mid-week gain of 123 points, the BSE Sensex ended the week with a loss of 230 points (8.13%), while NSE lost 65 points (7%). With this second consecutive week of sharp fall, the BSE Sensex has shed 19% (593 points) since the attack on America.

Positive triggers too didn't have any impact -- the hike in FII exposure from 49% to 74% in Indian companies, introduction of margin trading, raise in the buyback and acquisition limits by the companies. While these moves aimed to restore the run away in FII investments and stem the bearish sentiment since the US attacks, the foreign portfolio managers still rushed out with net sales of Rs 159 crore in the week.

The reason being that it will take 3-6 months before FIIs can actually hike their exposure in the specified companies. Over the long term, the move will upgrade the chances of India's weightage in world indices (MSCI Index). The discontinuation of badla trading had limited the option of speculators and hence a sharp drop in volumes at the bourses. The introduction of margin trading will allow the participant to fund his stock investment through banks. But in view of the recent scam involving banks lending against securities with be an impediment to expeditious and easy participation from banks. Besides this the easing of buyback and acquisition norms will enable the cash-rich Indian companies to consolidate holdings and enhance the trading activity at the stock exchanges.

The Economy:
30 per cent of Indian export income is from the USA. India's oil imports account for 70 per cent of our total consumption. At the same time the bearish FII sentiment has hit the Indian currency which was ruling steady against the dollar, prior to the attacks. The rupee has fallen by 1.25 percent since Tuesday, September 11. And the persistent weakening against the US currency will have two serious implication -- hikes in overall interest rates to subdue the inflationary pressure and a bloat in India's oil import bills. And rising international oil prices will further bloat our import bill. However OPEC countries have reiterated that oil prices will be sustained at $25.

Besides fiscal challenges, the numbers of industrial growth in August do not indicate immediate recovery. The industry grew at mere 0.3 percent in August this year, compared to the 4.4 percent during the same period in 2000. During August, India was slapped up with two currency downgrades for a slack progress in PSU disinvestment and reforms process. With the airline industry coming to a grinding halt after the US attacks, it will be tough going for Tatas to bring along a foreign airline partner in the bidding for Air India.

World Market in Doldrums:
The federal reserve's interest rate cut by 50 basis points failed to stem the slide in Us markets which have fizzled down by more than 7 percent on Dow Jones and Nasdaq. The squeezing of Airlines payrolls by 70000 and the huge bailouts to the industry has spread fears about the US economy going bust. Towing the federal bank, the central banks across Europe and Asia cut the interest rates. Nevertheless in past two weeks, Hangseng tumbled the most with 14 percent fall, UK's Footsie - 11.88% and Nikkie- 9.15%,

Outlook
The market at its 8-year low, there isn't substantial downside for equities. Fundamentally and in historical perspective equities look very attractive today with the price to book value ratio of Sensex at 1.9 and a dividend yield of 2.37 per cent. But for these numbers to translate into price gain, investors have to think. And its not clear still if they are willing or when they begin thinking fundamentally.