Nov 2, 1999|
Sensex falls 15.8% in 12 trading sessions
The 30 share BSE Sensitive Index has registered a fall of 15.8% over the last twelve trading sessions. The fall assumes significance as it comes in the wake of an improvement in the domestic politico-economic scenario. Here we take a look at both sides of the coin and try to find justification for the recent bear hammering.
Reasons to Buy:
- The formation of a relatively stable central government
- Moody's upgradation of India's rating outlook
- Pick up in economic activity-cement, automobiles and steel have recorded sharp gains in volume sales
- The recent barrage of reforms initiated by the new government and the prospects of more such measures being taken in the coming weeks
- The 30 share BSE Sensitive Index trades at a price/earnings (p/e) multiple of approximately 15, while the S&P 500 (US) trades at a p/e of 33. Thus, valuations are relatively more attractive on the Indian bourses.
Reasons not to Buy:
- The key concern currently pertains to the Y2K problem. The concern arises from two aspects – first, given India's non-preparedness there is a possibility of breakdowns in various sectors. Secondly, software companies, that have contributed in a significant way to the stock market rally, are likely to witness a slowdown in earnings as revenues from Y2K related projects decline and customers delay implementation of new projects.
- On the 12th of October the carry forward (only long) positions stood at a whopping Rs 38 bn. Thus a large part of the rally was fuelled by purchases on margin. The figure now stands reduced to Rs 28 bn. However, it must be noted that these figures are officially declared and in all probability the actual long positions are likely to be much higher.
- The fiscal position of the central government continues to be a cause of concern. The government has already incurred a fiscal deficit that was equivalent to 60 % of the annual limit by the 30th of September (half year).
- India has recorded its eleventh successful monsoon this year. However, the distribution has been skewed and this has raised concerns regarding the summer crop output. A slowdown in agricultural production could postpone economic recovery.
- A lot of retail funds have been deployed in the IPO market, and this has dried up the flow of fresh funds into the markets. Moreover, a lot of funds and investors have been accumulating funds to invest in the offerings of public sector enterprises.
- FII buying has come to a halt and infact October has witnessed a net outflow of funds. This is mainly due redemption pressure being faced by the foreign funds.
The reasons to support either the bullish or the bearish mood are many. However, the key factor that has been responsible for the recent slide has been the absence of FII (foreign institutional investor) buying support. This has caught the market (momentum investors) in a situation where the momentum investors have been left holding huge outstanding positions. Whether the markets will witness a turnaround to reflect the improved politico-economic situation is yet to be seen. Until then, technical factors like carry forward positions, badla rate et cetera will continue to have a significant impact on the performance of the markets.
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