Volatility may continue on bourses

By Oommen A. Ninan

MUMBAI, APRIL 30. The markets are continuing their southward journey with shadows of the bears looming large. Barring one trading session last week (Tuesday), there was nothing to cheer about. Throughout April bourses witnessed high volatility and a steady decline in values of the much favoured information technology, communication and entertainment (ICE) stocks. Even excellent results reported by the majors in each of these sectors did not provide any succour to the market and bear hammering continued.

``Investors are confused on their strategy,'' said Mr. V. R. Srinivasan, Managing Director of R. K. Chari Stock Broking. In the past they followed Nasdaq until it crashed. But when Nasdaq showed some recovery and stabilisation, Indian markets especially the information technology, communication and entertainment stocks continue to flounder. For a while, it appeared as though it was going to be a free fall until the market recovered a bit last Tuesday. Even this did not last beyond a day as, on the subsequent days market continued to fall.

With investments by foreign institutional investors positive throughout the week and no redemption pressure on the domestic mutual funds it was expected that stocks would recover. But operators continued to press the panic button and stock prices touched new lows every day. The corporate results announced so far are quite encouraging. But markets ignore this favourable factor.

The Bombay Stock Exchange 30-share sensitive index (Sensex) closed the week at 4657.55. Last Monday the Sensex closed at 4511.05, the lowest close since November 5, 1999, though it opened strong on that day at 4723.27.

Last week's listing of two initial public offerings (IPOs) from the pharmaceutical sector namely Cadila Healthcare and Elder Pharma are at a substantial discount to the issue price - eventhough they were oversubscribed many times. This will affect sentiment as most of the issuers have to either scale down the price substantially or defer the issues altogether.

Many newly formed information technology, entertainment and communication companies are waiting at the wings to come out with IPOs in the near future. However, this recent development could have put them in two minds. On the whole, both the primary and secondary markets lost direction all of a sudden. Even the institutional players could not fathom the behaviour of the market. Despite heavy purchases there is no dearth of sellers and prices continued to fall.

One of the main reason for this is the rapid movement on the way up when most of the stocks broke all barriers and continued to climb high within a short time. It may be interesting to recall what Mr. Jeremy Beswick, President and CEO of Birla Sun Life Asset Management Company stated recently. He said, ``over the last twelve months there has been a tremendous and sudden interest in the stock market which has attracted many investors into equities for the first time. The lure of the ``new economy'' story has proved irresistible to many investors in this new ``gold rush'', often regardless of the underlying fundamentals of the individual companies in question. But the fact remains, as experienced investors everywhere know, that it is the net, bottomline earnings growth number that drives a company's stock price over time. We in conjunction with many professionals in the European and U.S. markets, see the latest falls in this market as a healthy and natural shake-out; investors are now on a flight to quality and the solid, well managed, profitable companies with a future will be the winners when the dust settles. This may be a rough rise, but in many ways this is an ideal market for fundamentalist bottom-up stockpickers.'' Definitely the recent fall in the stock market will help for a shakeout in the forthcoming IPOs too.

The banks which lend against the stocks continued to press sales as the margins were getting depleted every day. ``Until this position stabilises,'' said Mr. Srinivasan, ``the market may not recover and many scrips could continue to move down.''

Institutions and banks should now put their heads together and give some direction to the market. The Unit Trust of India was totally absent except for a symbolic statement from its chairman which was as usual ignored by the market. The support extended by the other institution was hardly adequate and the sales outstripped the purchase in the aggregate. With Nasdaq showing definite signs of consolidation, if the market do not recover now the small investors will lose confidence which would only aggravate the crash.

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