Volatile trend may continue on bourses

By Oommen A Ninan

MUMBAI, APRIL 1. The stock markets are likely to remain volatile as the volume has come down sharply. The arrest of Mr. Ketan Parekh and the imminent arrest of his associates have further deepened the crisis. Another bout of lack of investor confidence in equities will have large implications.

The Bombay Stock Exchange (BSE) 30-Share Sensitive Index (Sensex) moved down by 30.90 points at 3604.38 points from the previous week's close of 3635.28. On the National Stock Exchange (NSE), the S&P CNX Nifty Index was down by 14.05 on Friday at 1149.25 as compared to the previous Friday.

The market was gaining until Wednesday, but failed to hold the momentum as reports of the pay order scam committed by brokers affected sentiment. On the last day of trading, stock prices tumbled by 147 points on reports of impending arrest of Mr. Ketan Parekh. There were also reports of selling by U. S. based listed fund during the week to meet redemption requests.

Foreign institutional investors (FIIs) were aggressive buyers. However, the FII flow turned negative on the last day of the week. The net FII buying figure is expected to be much lower than the earlier weeks.

The net outstanding position in the market started falling sharply as investors and operators preferred to stay away. The current debacle in stock prices has taken the Sensex back to where it was two years ago.

However, prices of many technology, media, telecom (TMT) stocks are much higher than those that prevailed two years ago. Basically the fall over the last several days has been due to a variety of reasons - continuous stream of earning warnings from leading U.S. technology companies, fears of a sharp slowdown in the U. S. economy leading to both Dow Jones and Nasdaq breaking critical technical levels, fears of Indian technology companies also being affected by the U. S. slowdown, the payment crisis at the Calcutta Stock Exchange (CSE) over two or three settlements, a threat to stability of the Government on account of the Tehelka episode and finally fears of losses to banks being much higher than already reported.

``The scenario over the next couple of months would largely be determined by the fallout of the above factors,'' said Mr. Shyam Bhat, fund manager, Tata Mutual Fund. For example, leading Indian information technology companies will start declaring their fourth quarter results commencing from the middle of April onwards. Secondly one would wait to see whether the budget is passed in the Lok Sabha before the middle of May. This would be an indicator of the stability of the Government as well as the implementation of the market friendly proposals in the budget. Thirdly the extent to which banks have been affected by way of lending against shares will also be keenly watched.

``The liquidity in the market has dried up following the ban of naked short-sales and neither the prices of scrips nor the index levels can be considered as real indicators,'' Mr. Bhat argued. One of the fundamental assumptions of technical analysis is one is free to buy and sell shares. With short sales having been banned this assumption is being violated; therefore the index levels are not a true indicator of the present situation. Dried up liquidity in the market has resulted in scrips hitting downward circuits on the slightest bad news or even small selling orders and upward circuits on the slightest market recovery or even small purchase orders. Therefore, the market is expected to remain volatile over the next couple of months.

``Volumes have dried up with uncertainty over Ketan Parekh's case and that was visible since the last fifteen days and in an environment of thin volumes it is becoming more difficult to predict the market movement,'' said Mr. Jignesh Shah, Strategist, ASK - Raymond James Investment Management. Ban on short-sales also led to drying up of volumes. It seems the market would take a longer time to consolidate at the lower levels. With thinner volumes volatility would be excessive and also retail investors would be hesitant to enter the market. Said Mr. Shah, ``We may see an environment of lack of confidence at least for the next quarter and till that time fundamentally value based stocks may attract institutional money which would not be large as volume- liquidity has been one of the main criteria for FIIs to invest.''

A few foreign funds may also look at the other markets mainly on these investment criteria. Overall global market cycles are down because of the U. S. recession and all the global stock markets are drifting down.

Cross border investment in the second quarter of the calendar year - April to June - is generally lacklustre. In these circumstances, if India loses the investment priority the probability of money flowing to other stable markets is high. At present, China and Korea are the stable markets among the emerging markets in the region. Thus a fund outflow to these markets may hit India.

Send this article to Friends by E-Mail

Section  : Business
Next     : BoP surplus in Q3: IMD bonds come in handy