When the Chinese dragon sneezes, and when economists in America start using the word recession, it's inevitable that most of the world markets that matter will catch a cold. Yet, if you compare the Sensex's performance with the world's leading indices over the past fortnight, it would appear that the Indian markets have been battered the most. For instance, between February 19 and March 5, the Sensex lost 14 per cent; the Shanghai Composite shed 7 per cent in this period, and the Dow was down 5 per cent, till March 2 (see Battered and Bruised). That's because for Indian investors, these global cues served as a well-timed alert to trigger off a sell spree in a market that was hovering in the overvalued zone. On 2008 forward earnings, the Sensex on an earnings per share of Rs 840 was trading at a price-earnings multiple (p-e) of 18 times.
Perhaps the biggest trigger for the global bearish phase is the appreciation of the yen-and if Indian markets got hit badly it's also courtesy their new-found appetite for Japanese portfolio investment. According to estimates, Japanese investors would have pumped in roughly $1.3-1.5 billion (Rs 5,720-6,600 crore) into domestic stocks in the past 15-18 months. "Investors squaring off their trades due to the strengthening of yen has been the reason for the fall in equities across markets," says Rushabh Sheth, Managing Director, Karma Capital. "The Indian market is no more isolated and any global event will have an impact on our market," he adds for good measure. Indeed, a host of big global investors resorted to squaring off yen carry-trade (borrowing in yen and investing in other currencies, mainly the dollar) in the past fortnight. This is because the till-recently weakening yen has suddenly strengthened versus the dollar. In India, foreign institutional investors (FIIs) in four sessions till March 1 were net sellers to the tune of $0.7 billion in the cash segment and $0.27 billion in index futures. "Apart from the impact of collateral damage, tightening of the rates in Europe, news of Chinese regulators tightening their grip over companies on issue of price rigging, tightening of rates in the mortgage market in the us and announcement of ex-chief of Federal Reserve, Alan Greenspan, of a possible recession in the us have led to jitters among global investors," says Nilesh Shah, President, Kotak Asset Management Company. Adds Rajesh Boghani, Retail Dealer, Parag Parikh Financial Advisory: "The market has broken its support level of 12,800 and the next resistance level is 10,880-11,000. And given the current market environment touching those levels looks possible." "Due to short-term concerns (rising interest rates and inflation), post-correction, I see the Sensex consolidating more in 'U' manner than in a 'V' manner like before. It will take at least six months for the Sensex to touch a new high; by the year-end it will hit 15,000," says Shah.
The ongoing correction may have coincided with the Finance Minister's Union Budgetary proposals, but P. Chidambaram might have just been a victim of bad timing (the Chinese crash took place a day before the announcement of Budget 2007). The good news, though, is that most traders feel that the India story is still intact. "Being among the fastest growing economy and markets, it is not possible for global investors not to be invested in the Indian market," says Boghani. This time around, however, the turnaround might just take a wee bit longer-around six months is the consensus on Dalal Street.
Primary Bloodbath
Crackdown on a recently-listed stock makes IPO investors panic.