Flashback to February 2000 and the BSE Sensex (the most widely followed domestic stock market index) seemed to be heading for the magical 6,000 mark. The reasons were many - a pick up in the economy, political stability, a boom in technology stocks and a significant rise in foreign institutional investment. Today, the situation is one of panic (save for yesterday when the market registered a rise after a long gap). How did this come about?
First came the Union Budget, which proved to be a disappointment (atleast when compared to the expectations). The decision by the government to withdraw tax exemptions given to companies exporting goods and services (including technology companies) hit valuations in the sector. The general sentiment suffered a setback and valuations tumbled across the board.
The whammy came in the form of a sharp decline in the NASDAQ (pricking of the bubble, if one can say). Valuations of technology stocks took a battering. Infact most technology stocks have since declined by over 50-60%. This is also evident from the sharp erosion in the net asset values of technology funds. Run a query to find out who lost the most
The other factor that led to the dramatic turn in sentiment was the issue of taxing the Mauritius based foreign institutions.
The dramatic rise in stock market volatility can be attributed to uncertainty in market sentiment pertaining to the fantastic valuations of technology stocks (which account for over 30% of the weightage in the Sensex).
It is also interesting to note the movement in foreign institutional money over this period. Infact during the last few trading sessions even as the markets tumbled, foreign money kept entering the market. This contrararian approach has infact played a major role in the rebound witnessed on the bourses the other day.
The markets have indeed had a roller coaster ride over the last three months. Whether the markets will recover lost ground will depend to a large extent on the valuations of the technology stocks. And these in turn will reflect valuations on the NASDAQ. Until then, be prepared for higher volatility.