Global jitters it is! By Fakhri H. Sabuwala

1st August 2007 may go down in the history of world stock exchanges as the day of global jitters. A marked withdrawal of funds from emerging markets initiated by crisis of mortgage funding in USA sent every market into a tailspin. Beginning from the previous night’s flight of fright on the Dow Jones & the Nasdaq, the tremors spread to the Nikkei, Hang Seng, Kospi, Shanghai, Taiwan, Sensex and Nifty. The third largest single day fall in BSE’s history, heightened volatility and a market ratio of 13 scrips falling against a single advance sums up the global jitters that prevailed last week. The crisis seems to be emanating from the subprime mortgage troubles in USA. The crisis has assumed such a dimension that it could engulf some big names in this fire. The crisis is now percolating to credit markets, exchange markets, hedge funds and also to equity markets. We are in for a very rough ride and may be at the tail end of a cycle. The current concerns will spill over to real economic issues and which will be a painful process to pass through. The subprime mortgage defaults seem to be initiating larger troubles both for the US and emerging markets. A lot of bankers, investment banks and hedge funds shall face this queer music. A feeling of risk aversion is building up and it shall result in huge withdrawal of funds from emerging markets. Although the figures of FIIs withdrawals from India could not be logged in by the time of this dispatch, the figures of Taiwan are fatal. A single day FII sell off to the tune of $1.5 bn. and totalling to $4.5 bn. in the last four sessions leave no room for doubt as to what risk aversion can bring about. A school of thought promoted by never say die optimists feel that the Indian growth story and sense of great resilience might save us from the great doom. It may be wishful thinking, based on previous experiences. But the reasons this time are far away from the reasons of yesteryears. Also, the momentum of India’s growth and the levels of price:equity multiples calls for great caution. Even if nothing worse happens at home, growth compression may put India’s dream run to test. One silverlining in this dark cloud is the rising equity cult and consciousness, which shall provide large inputs to local mutual funds to put into the secondary market. This may keep the show going but it will surely be a lacklustre show at least for now and the near future. What does an investor do at times like this? For one, being caught unawares in the middle of a great show is bad news and partial divestment of one’s portfolio aimed only at covering the crisis may be prudent. Selling in a falling market is always a painful decision but selling around 14.5K to 15K Sensex level is a great consolation for the insatiable human greed, which we all nurse in our hearts. So just control your jitters before global jitters control you.

Market is consolidating By G. S. Roongta

The stock market has turned weak beyond expectation. It gave a clear signal of weakness in the previous week (week before last) itself when the BSE Sensex plunged from a high of 15,868.85 to a low of 15,159.68 on Friday, 27th July 2007 while closing a bit higher at 15,234.57. Thus just when the Sensex was speeding up to the 16K mark and had only 131 points to cover, there emerged a need for some consolidation. This was not very surprising as the Sensex had risen too fast and too early after it touched the 15K level. It appears that the bulls, in their frenzy, had totally forgotten about the presence of the bears in the market and were in a tearing hurry to push the Sensex to the 16K level. Such a sharp rise called for an equally sharp correction and which is most desirable for a healthy market. The bulls should never overlook the presence of the bears and should let the market consolidate after every significant rise before the next upward move. As a result, the whole of last week witnessed volatile trading as the Sensex moved up by 300 points and went down further by 200 points during intra-day while closing prices reflected only a marginal change on both the BSE Sensex and the CNX Nifty. For example, the Sensex went up to a high of 15,481.51 on Monday and fell to a low of 15,135.25 while closing slightly up by 26 points at 15,260.91. On Tuesday, 31st July, the market was very volatile and stock prices fluctuated heavily on both sides by nearly 350 points and the Sensex shot up in the last leg of 15 minutes to close at 15,550 recovering 200 points from its low level of the day in mid-session. This, however, led to a crash on the next day, which was the beginning of a new month i.e. 1st August 2007. The market opened with a downward gap of 200 points and kept on losing ground to close the day with a sharp fall of 615 points. This was the sharpest fall of calendar 2007 and it pierced the psychological level Sensex 15,000, which the market was able to establish after several months of struggle. This sudden and heavy meltdown was on account of global cues especially the crash in the US sub-prime market wherein a leading mortgage lender is reported to have run out of cash to pay off its creditors. As a result, a leading US hedge fund may turn loss making and add to the growing trouble in US financial markets. The Indian growth story, which is good by all accounts, we are marginally insulated as the Rupee is not fully convertibleagainst all currencies. But with FIIs holding a huge stake in our market capitalization, it should not surprise anyone that these funds liquidate Indian stocks to save their skin from default in their home markets. Any such move on their part is bound to affect the Indian bourses. In case this malaise is confined to a single fund, it may not be so terrible. But if it spreads to other players, it could be disastrous. Hence we must remain cool till the clouds of uncertainty disappear. In view of this grave situation, the stockmarket may turn choppy and uncertain for the time being. But it now appears quite certain that the US economy has started showing some kind of weakness and if a crisis like situation does not develop, we may be saved from an immediate trouble or any panic in the markets. But if a crisis starts ballooning then real bad days may lie ahead of us too and we must remain cautious. It is therefore advisable to lighten one’s outstanding position because in a crisis there is no classification of good or bad stocks. Even good stocks fall and that too with greater speed and force as against their other counterparts. No specific sector or stock is safe in such a crisis. In company focus last week, we had written on Hindalco, which is facing a takeover crisis as per market reports for quite some time. The company management, however, dismissed such reports and were equally dismissive about the stingy attitude of the management in sharing the fortunes of the company with its shareholders as raised at its AGM on Tuesday, 31st July in Mumbai. Several speakers lamented the company’s distribution policy citing the examples of the Tatas, Reliance, Sterlite, Infosys etc. but the management took it lightly maintaining that the funds were needed to meet the needs of expansion. One, speaker even cited the example how the Hindalco stock was quoting at Rs.250 when the BSE Sensex was nearly 8,000 and the stock had fallen even though the Sensex has doubled since then! Listening to the shareholders and the mood of the attendees, this writer feels that the article published last week was both timely and topical. But the management continues to display an unfriendly attitude which will keep the stock subdued and help the promoters enhance their holding as indicated by news reports. The Q1 results of most companies were good showing 35% - 40% growth in their bottomline on an average. This was higher than market expectation and as such there should not be any cause of worry about the prevailing market sentiment. The distribution has also been quite good in line with the growth in the bottomlines except very few like Hindalco, which have opted to conserve resources. This plea, however, is very specious as how can the dividend payout, which is akin to a mug of water, be considered enough to meet the requirements when funds are required by tankers! Cement stocks once again fell as the government tried hard to soften the price of cement bags through some hard measures. In the recent fall of 1st August, cement stocks were hit the hardest. ACC tumbled by Rs.100, Grasim by Rs.150. India Cement, Ultratech and B group cement stocks like Shree Cement, Kesoram, Jaiprakash, too, were hit hard. But I still believe that so long as the country’s economy is on the fast track, no government action can force cement companies to occupy the back seat or deny them reasonable profit. It has once again been proved that cement is in short supply even though all cement plants are operating above their rated capacities but are unable to meet the robust demand. Under such circumstances, any government move to soften cement prices by its rigid policy measures rather than market mechanism will prove disastrous both for the government and the cement manufacturers.

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