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BSE Sensex: Finding a floor - Views on News from Equitymaster
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  • May 27, 2000

    BSE Sensex: Finding a floor

    14th of February marks a special occasion for the stock markets. It was the day on which the BSE Sensex flirted with the 6,000 mark for the first time in history (remember it was Valentine’s Day that day). It also happens to be the day, which marks the beginning of the end of the bullish reign in the markets.

    The bullish reign, it would not be totally incorrect to say, was more or less limited to technology stocks. Who could have thought that Infosys Technologies, which saw its initial public offering earlier this decade devolve, grow into India’s most visible company. Or Wipro becoming India’s most valuable company. There is no doubt regarding the business prospects of these software companies. The issue pertains to valuations accorded to them. So when these stocks crashed, like a pack of cards, down came the Sensex (which had recently been modified to include more technology stocks).

    Among the other factors that contributed to the decline in the Sensex were rumours of a possible drought in India. This affected among others the cement and consumer goods stocks, which are becoming increasingly dependent on rural demand to generate topline growth. Finally, foreign investors, faced with the prospects of increasing redemption pressure at home (US, which witnessed a crash on its technology bourse) and the reduction in the weightage of India in the popular MSCI Index turned net sellers for the first time in several weeks. The result was a sharp decline in the market indices.

    All these factors took their toll on market sentiment. The average outstanding position in the market declined from a high of over Rs 45 bn to under Rs 20 bn presently. The Sensex tumbled a stupendous 34% between the 14th of February and the 22nd of May.

    The markets however seem to be finding a floor at its existing level. Even much before the announcement that the monsoon wold be ‘normal’ this year, the markets had begun to stabilize. The news only buoyed buying sentiment, sending the bears for cover for the first time in several weeks. Along with this announcement, another development took place.

    Foreign investors, who had turned aggressive sellers in recent days, stepped in to make large-scale purchases. Only this time it was the real ‘old’ economy stocks that found favour with them. Stocks like Hindustan Lever and Colgate, considered to be safe and less volatile, jumped 12% on news of the buying interest. Cement stocks too turned volatile as buying interest surged.

    The Sensex seems to have found itself a floor and a reason to be euphoric. But will this buying interest last? Among the factors that could cut short this buying binge may be the instability in the region (both Pakistan and Sri Lanka are in the midst of a turmoil). And not to forget, a crash on the US bourses could lead foreign investors to sell in the domestic markets to meet redemption pressures abroad. Rally or no rally, expect the markets to come up with the least expected once again in the coming days.



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