Markets get the Chinese jitters

Wed, 20 Oct Closing

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It was yesterday all over again as the markets succumbed to last hour profit booking on yet another occasion. The BSE Sensex closed lower by 110 points (down 0.6%) whereas the NSE Nifty edged lower by around 45 points (down 0.8%). BSE Mid cap and Small cap indices were also not spared as both declined by around 0.5% each. More than two stocks declined for every one that gained on the Sensex today.

Most Asian stocks closed lower today whereas Europe has had a mixed opening. The rupee was trading at Rs 44.4 to the dollar at the time of writing.

Unlike yesterday, today's decline was more broad based and engulfed practically the whole of Asia. The decline, we believe, had mostly to do with China's decision to raise interest rates, a move that might hurt growth and stifle asset prices in the world's most populous and fastest growing nation. Investors are perhaps hoping that other Asian nations, including India, would follow suit thus leading to deflation in the asset price bubble that was threatening to get to alarming levels. While such a step would prove detrimental to asset prices in the near term, it is beneficial in the long run as it will lead to real economic growth and not cheap money induced inflationary growth.

In order to cash in on the IPO mania, a lot of realty firms had lined up their public issues. However, the lukewarm response to the listing of Oberoi Realty would perhaps force them to go back to their drawing board or shelve their plans altogether. Oberoi Realty, one of the more reputed names in luxury housing in Mumbai closed around 8% higher on its first day of listing today. Important to add that the company's Rs 10 bn issue was oversubscribed nearly 12 times and despite such a good response, the stock was not able to make much headway into the positive territory today. Perhaps, it had to do with the steep pricing of the issue. A lesson or two indeed for the other companies waiting in the wings.

Healthcare major Piramal Healthcare traded strong today and closed higher by around 1%. Interest in the counter was perhaps generated by an announcement by the company that its board would meet soon to consider a buyback of shares or a dividend. This decision is an outcome of the US$ 3.7 bn dollar windfall that the company earned after it sold its domestic formulations business to Abbott Laboratories of the USA. Although Piramal Healthcare has received very good valuations for the domestic formulations business, how the management utilizes this cash is the key. Of course, part of the cash will be deployed towards repaying debt, paying taxes, rewarding shareholders in the form of a special dividend and investing in existing businesses. However, let us hope that the company does not venture into areas whose prospects are poor and returns low. This way, investors will stand to lose out in the long term.