Business Today

On rough seas

The global liquidity scare has spooked the Indian stock markets. How to sail through the storm.

By Krishna Gopalan | Print Edition: Sept 9, 2007

As quickly as tides turn, the stock markets have run into stormy waters on the back of sharp mood changes in the global market. After a long, smooth and swift sailing on calm waters, the Sensex got its first serious jolt in a long time after a global liquidity scare sent markets worldwide on a tailspin, sending the Indian investors scurrying for cover.

The global storm has turned the Indian market extremely volatile as daily market swings are as large as 600-700 point movements both ways. Such sharp swings have not been seen in a long time. And it all began when the fears of US subprime mortgage market began making headlines. Just when it looked like the month of July was going to be smooth sailing with the market reaching a new high, the last few days wrecked havoc on the market.

Nothing quite prepared anyone for what was to happen on July 27 when the Sensex fell by a whopping 542 points to close at 15,234.57, and continued its freefall the next trading day by another 299 points. It bounced back on August 8 to 15,307.98. But some serious selling from the foreign investors saw the Sensex hit the sub-14,000 mark on August 17 for first time in 92 days, though it bounced back to close at 14,141.52 points. Foreign investors have pressed huge sales of Rs 7,700 crore since July 27, having invested more than Rs 10,000 crore from July 1-26.

Oscillating markets

The issue is not so much about the movement upwards as it is about the volatility, and the global mood shift, which has left many investors confused. And it is only natural that India would experience the rub off. Clearly, the situation has changed from optimism to that of caution.

The steep fall on July 27 confirmed that India was very much a part of the global markets and even a small setback there was certain to have more than a marginal impact here. The global liquidity was the prime reason for the market’s run and perhaps the prime reason for its mood swings. “Volatility is here to stay for a while and this is really the result of liquidity, which has exploded in the last three years,” says Mugunthan Siva, Chief Investment Officer, Optimix.

For a while now, the inflows into India have been strong and the returns, attractive. Siva terms this as a situation of easy come and easy go. “Yes, money flows will continue,” he adds. That is something not too many are likely to disagree with. According to Shankar Sharma, Vice Chairman and Joint Managing Director, First Global, the volatility is clearly a rub off from what is happening globally. “It is a result of what is going on in the US and the West at large. I do not think there is any reason to be concerned,” he adds. If you are looking at India from a long-term perspective, that’s true indeed.

The volatility, says Paresh Khandwala, Director, Khandwala Securities, is a result of what has been going in the global financial markets. “It is all about the interest rates and the numbers from the US economy,” he maintains.

Caution in the short-term

While India, from a long-term story, looks attractive, there are areas of concern. For instance, HDFC Bank’s Country Head (Equity and Private Banking), Abhay Aima, is clear when he says he is not too optimistic. “At this point, I am quite concerned. From an immediate-term perspective, I am not bullish at all,” he states. Like most people, he is bullish about India in the long term even as he specifies what the issue in the short term could be. “We are not sitting on cheap valuations in India right now,” notes Aima.

At a time like this, the investor would do well to adopt an approach that is both cautious and practical. “The strategy overall should revolve around understanding risks and not get into any new buying. If an investor is fully invested in this market, it could be a good time to take some profits,” says Siva.

Interestingly, most opine that a volatile market presents itself with an opportunity.

For instance, there is a good chance that there could be picks at good prices. “My advice to investors is to go out and buy. The investor needs to look at the current situation as nothing more than an opportunity,” says Sharma.

The trick for the investor is to identify those stocks which are never easy. Not everyone has that point of view. Aima thinks it should be a combination of a couple of things. “The investor will do well to adopt a wait and watch attitude. At the same time, if there is a chance to book profits, he must do that,” he adds.

The market could go through a longer period of volatility because the fog has to clear in the global markets, which could take a while. And besides, the Indian market’s bandwidth has increased from 3,000-6,000 to 10,000-16,000, so therefore the volatility will be higher. According to Khandwala, “The volatility band has clearly increased. But the corporate fundamentals are good.” The age-old adage of exercising caution with minimal risk still rings true.

Khandwala thinks the time is still good for money-making opportunity if one still buys selectively. Growing companies will now come at cheaper valuations. Money flows, says Siva, will continue, even as there is an opportunity for the long-term investor. “It is important to be an investor rather than a speculator.”

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