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Global jitters! - Views on News from Equitymaster
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  • Oct 8, 2005

    Global jitters!

    After the exceptionally strong gains witnessed last week when the Indian stock markets logged weekly gains of about 5%, amongst the best since the inception of this bull run, this week turned out to be diagonally opposite. However, the week-on-week picture of BSE-Sensex losses at about 2% and NSE-Nifty losses at 1% does not depict the true picture. Further, this time around, the development that led to the Indian indices cracking was not domestic and was primarily owing to the cascading effect of a global stockmarket meltdown. Well, almost.

    As mentioned above, the real picture of the Indian stock markets does not come out in the weekly losses calculation. This is because the Indian stock markets had a blistering start to the current week of trading, riding high on the strong gains registered last week. The indices opened on a firm note on Monday and proceeded to trade higher throughout the trading session. Tuesday was no different as the bears seemed to have had retreated, as there was hardly any evidence of selling pressure even at the higher levels. While the indices had created records in the initial hour of trade only, they continued to travel into higher orbit, in the process creating new lifetime highs. The sustained buying well into the closing minutes of trade helped the Sensex not only breach the 8,800 mark (see adjoining chart) but hold ground in this territory!

    However, Wednesday onwards was a different ballgame altogether. The tables turned on the bulls from thereon, as the bears rode high on weak global sentiments and sold equities across sectors. This saw the Indian benchmark indices, primarily the Sensex and the Nifty, fall like ninepins. However, there was no specific domestic development that could have led to this crash. The correction was triggered primarily by the correction in global stockmarkets, which had a cascading effect on the Indian stockmarkets. Further, with the current valuations of the Indian stockmarkets being stretched with a near-term perspective, investors took the opportunity to book profits. This led to the Sensex and the Nifty cracking by about 5% each from their peaks achieved in Wednesday's early trade, much higher than most other South-East Asian indices (see table below). However, since our markets had registered strong gains in the first two trading sessions of the week, the weekly picture was relatively better.

    Country Index Intra-week fall (approx.)
    Brazil Bovespa -9.4%
    Mexico IPC -6.2%
    India Sensex -4.7%
    India Nifty -4.5%
    Hong Kong Hang Seng -4.5%
    US Nasdaq -4.4%
    US S&P 500 -4.0%
    South Korea Seoul Composite -4.0%
    Japan Nikkei 225 -4.0%
    US Dow Jones -3.8%
    Germany DAX -3.1%
    Thailand SET -3.0%
    UK FTSE 100 -2.8%
    Indonesia Jakarta Composite -1.8%
    Singapore Straits Times -1.7%
    Taiwan Taiwan Weighted -1.5%
    Malaysia KLSE Composite -0.5%

    Factors that led to global stockmarket weakness this week were the worries about inflation, rising interest rates and slowing corporate profits in the US. Comments from Fed officials sparked apprehensions about the Fed not abating from its rate-hiking campaign in the near term, which could impede FII flows towards emerging markets. Also, worries about slowing corporate profits and profit erosion due to high energy prices weighed heavy on investor sentiments. A retreat in crude oil prices to below US$ 62 per barrel proved to be of no relief.

    However, the Indian mid-cap (BSE Mid-cap Index down 0.2%) and small-cap (BSE Small-cap Index up 0.7%) segments were able to weather this profit-booking wave, as the selling pressure came primarily from FIIs, which largely invest in index and 'A' group stocks. It must be noted that FIIs, in the first four trading sessions of this week, were net sellers to the tune of Rs 2 bn, while domestic mutual funds (MFs) were small net buyers to the tune of Rs 377 m. Thus, if Foreign Institutional Investors (FIIs) turn out to be net sellers on Friday again, it would be the first time since May 2005 that FIIs would have sold on a weekly basis (see chart above).

    Top gainers over the week (NSE-50)
    Company Price on
    Sept 30 (Rs)
    Price on
    oct 7 (Rs)
    H/L (Rs)
    BSE-SENSEX 8,634 8,492 -1.7% 8,822 / 5,558
    S&P CNX NIFTY 2,601 2,574 -1.1% 2,669 / 1,750
    DR. REDDY 852 940 10.3% 946 / 605
    RANBAXY 492 523 6.4% 640 / 435
    ZEE TELE 173 182 5.6% 206 / 128
    MTNL 127 134 5.1% 170 / 110
    WIPRO 371 388 4.5% 414 / 272

    Now let us consider some stock specific development this week:

    • Domestic pharma major, Dr.Reddy's, was the top gainer amongst Nifty stocks this week. The company is scouting for a big-ticket acquisition in the European region in a bid to strengthen its generics portfolio following severe competition and price erosion witnessed in the US. Besides this, recently the company also formed 'Perlecan Pharma', which will be involved in the development of the former's molecules through Phase II clinical trials including the exploration of out-licensing opportunities. We believe that these initiatives are likely to boost the company's performance going forward. Other pharma stocks

    • In related sector news, the UK decision on Ranbaxy's challenge to Pfizer' Inc's drug 'Lipitor' is scheduled to come out next week. 'Lipitor' is currently the world's largest selling drug having garnered revenues to the tune of US$ 12 bn in CY04. While the US accounts for 80% of 'Lipitor's global revenues, UK accounts for around 7%. It must be noted that Ranbaxy has won the patent challenge in Austria and this has led to speculations that the company has a very good chance of winning the UK decision as well. The all-important US decision is expected to come out either by end of CY05 or early CY06. Other pharma stocks

    • Geometric Software (GSS) was the biggest loser this week amongst the 'A' group stocks, down almost 13%. This was on the back of an announcement by the management that it expects a below-par performance in 2QFY06. This is effectively the second successive profit warning issued by the company, after the first one issued in June this year. The company has once again given reasons such as delay in the commencement of projects as well as initial teething problems relating to the launch of its CAD-PDM product. This, once again highlights the enhanced risk that is associated with a small company like GSS. However, the management has also stated that it believes that it is on the right track with regards to its long-term strategy and the demand environment is strong, as witnessed by the robust order pipeline that the company has.

      Top losers over the week (NSE-50)
      Company Price on
      Sept 30 (Rs)
      Price on
      oct 7 (Rs)
      H/L (Rs)
      ICICI BANK 602 530 -11.9% 615 / 277
      ITC 137 126 -7.6% 149 / 71
      TATA STEEL 424 395 -6.6% 456 / 278
      VSNL 357 338 -5.3% 445 / 161
      RELIANCE ENERGY 581 555 -4.5% 707 / 436

    • Private sector banking major, ICICI Bank, is planning yet another equity issue after the Rs 31 bn public offer in 1QFY05. Although the bank has not divulged the exact quantum of capital to be raised, for the same it will take into account the capital needed for sustaining credit growth over the next couple of years. The bank is also raising Rs 15 bn in tranches through Tier-II subordinated bond issues. The bank's capital adequacy ratio (CAR) stood at barely 12% at the end of 1QFY06, which is grossly insufficient for sustaining the current rate of credit growth (49% YoY in 1QFY06) and prepare for Basel II compliances. The stock was the biggest loser amongst index stocks this week, as the planned equity issue would lead to dilution of earnings to that extent.

    Going forward, investors would start to feel the heat, as the markets could become more volatile as corporate India starts to reveal its September quarter performance. While we believe that the outcome of the India Inc. financial performance scorecard would decide the market movements in the near-term, we would advise investors to take a long-term approach while investing. While investment in equities was never risk-free, this is compensated for by the higher returns. The risks can surely be mitigated to a large extent by following a disciplined, staggered and fundamental investment approach, which is an optimum strategy, especially for a retail investor, for whom, preservation of capital is as much important as earning decent returns on the same. Happy and safe investing!



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