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Markets mirror World Trade centre

Sep 15, 2001

It felt like the rug was pulled beneath one's feet. And no we are not talking of the World Trade Centre towers but our very own bourses that went in for a free fall after the tragic events on Tuesday. In the current week, the benchmark indices, BSE Sensex and NSE Nifty, shed 11.5% and 11.1% respectively. The Sensex has retraced it steps to December '98 levels and is trading at a 32-month low. Besides the human and financial loss the strikes have come at a delicate time for the global economy (could the terrorists have thought of this angle). The U.S is one leg into recession with only retail spending providing life support systems. With the current events, many believe, consumer confidence will be hit, pushing America into economic contraction. Several countries of the European Union (EU) are experiencing lower GDP growth, Japan is in recession and other Asian economies have also seen a marked slowdown. Led by U.S, many fear, the strikes and retaliatory actions could trigger a global recession.

Friday: Correction time
Nikkei 0.9%
Hang Seng 4.1%
FTSE - 100 -3.8%
DAX -6.3%
Sensex -5.3%
Nifty -5.4%
Nevertheless, although the situation looks bleak world financial markets have adopted a responsible and ethical approach to their dealings post attacks. Traders on European bourses agreed informally not to take advantage of the possible panic in the market. Consequently, leading stock markets did rise in the days following the attack. This prevented a knee-jerk correction with market forces acting gradually. European bourses seem to have seen a correction yesterday. Similar steps are being taken in preparation of Monday's opening in the U.S. In fact, the Securities Exchange Commission (SEC) is expected to announce measures to facilitate an orderly market.

Such practices, however, do not seem to have been adopted by market participants in India leading to a free fall of benchmark indices. Such behaviour is likely to adversely impact investor sentiment, create panic and lead to rumour mills working over time. All of which are unhealthy for the market. Surprisingly, those very same participants (FIIs) in leading markets, which adopted responsible practices, have been net sellers of Rs 1.3 bn since the attacks on Tuesday. Whereas, mutual funds, which have been net sellers throughout calendar year '01, turned net buyers possibly in an effort to support the market.

India panics
Sensex -11.5%
Nifty -11.1%
Nikkei -4.8%
Hang Seng -7.0%
Trying to be not entirely unfair to this category of investors the selling could be driven by the need to rebalance country portfolios. Similar to equity share portfolio rebalancing, FIIs invest across markets and need to adjust their exposure to different regions. In a slowdown, money generally flies to blue chips and especially defensive sectors that are most likely to hold up in a downturn. Similarly, in such uncertain times, global portfolio investments could see a flight to quality. Money flowing to countries / markets most likely to be least affected by the 'acts of aggression'. Also, to economies that have the ability to withstand any prolonged period of hardships. Simply, which economies would hold up should the conflict continue for a prolonged period.

The Sensex currently is trading at a 32-month low and significantly below the levels seen through the Kargil war. With the pessimism built up over the past six months participation is weak, which has led to poor support on the bourses. The knee-jerk reaction and FII selling seems to have overplayed the economic scenario facing the country.

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