Bearish phase persists on bourses

By Oommen A Ninan

MUMBAI, AUG. 6. The undertone on stock markets remains bearish as the bourses are rudderless and drifting. The funds - foreign as well as domestic - are keeping away from the markets. The confused scenario in the foreign exchange market created further vulnerability in the stock markets since the foreign institutional investors (FIIs) are reluctant to deploy new funds in India.

``With confusion continuing in the market it is better to avoid the stocks even at current levels. We retain our cautious outlook,'' said Mr. Imran Contractor, Research Head of Milan Mahendra Securities. Stock prices collapsed last Friday as operator-driven Information Technology, Communications and Entertainment stocks (ICE) tumbled sharply - some of them were down by 16 per cent - as operators unwound their positions.

The Bombay Stock Exchange (BSE) 30-Share Sensitive Index (Sensex) lost a further 90.54 points at 4186.16 for the week from the previous week's close of 4276.70. A sharp rally in the heavy weight Hindustan Lever (HLL) saved the index falling from a major crash on the last day of trading. On the National Stock Exchange (NSE), the S&P Nifty Index concluded lower on Friday at 1318.55 compared to the previous Friday's figure of 1333.80. The net long position was only marginally lower at Rs. 2,473 crores against Rs. 2,696 crores in the previous year. The market has seen a proportionate increase in outstandings which cannot be carried over indefinitely. ``High levels of outstandings make the market susceptible to technical factors such as change in margins norms,'' said Mr. Prateek Agrawal of SBI Capital Markets (SBICAP).

The earlier rally from 3,600 levels was to some extent supported by funds but was largely on account of speculative purchases ahead of first quarter results. Said Mr Agrawal, ``Both FIIs and mutual funds have been big sellers during the past two months. The selling was being absorbed mostly by domestic operators who had built up big positions. Total outstanding on the BSE and the Automated Lending and Borrowings Mechanism (ALBM) segment of the NSE crossed Rs. 5000 crores. Most of the outstandings were built on the premise that the funds will buy post results. Positions increased further as the other world markets rallied. There were expectations that since there is buying in the region, it is a matter of time before FIIs turn buyers in India too. However, this has not happened till now.''

Fund managers are not increasing their exposures beyond a certain level to the Information Technology sector as they have already reached the threshold limits. With the reluctance on the part of foreign institutions to commit new funds given the fluid scenario in the foreign exchange market and the consequent uncertainty, there is a dearth of new funds coming in. For example, if a foreign fund brings in $100, the fund gets at present around Rs 4,500. After three months if the rupee's exchange value vis-a-vis U. S. dollar reaches Rs. 47 the funds have to pay Rs. 4,700 to repatriate their money. Their loss in this deal is Rs. 200. When they bring in millions, their losses also run into commensurate huge numbers. So, many funds are moving to other markets, namely, South Korea, Malaysia and Taiwan for better returns. In recent times, India has the dubious distinction of being among the worst performing markets in Asia.

The sharp fall in Information Technology stock prices has led to most of the participants being perplexed by the absence on any institutional activity. According to Mr. Contractor, the sharp fall in some of the stock prices forming a major part of the portfolios of mutual funds such as Infosys, Visualsoft, Himachal Futuristic, Global Telesystem, DSQ Software, Satyam Computers, Sterlite Industries and Polaris, are likely to erode their net asset values (NAVs) sharply.

Moreover, there is also a sharp fall in the NAVs of the debt funds, due to tightening of the money market by the Reserve Bank of India (RBI) to defend the Indian currency. The sharp erosion in the NAVs may lead to redemption pressures on several of the schemes.

Among the old economy stocks, contrary to the trend, cement companies' stock prices rose handsomely with the price of cement being increased in several parts of the country. The dispatches for July have grown by about 46 per cent year-on-year basis. The stock prices of most companies improved sharply during the week. Tata Tea surprisingly reported a sharp improvement in profits due to other income comprising mainly dividends. If one were to exclude the same, profit before tax has dipped by 74 per cent with about 10 per cent fall in sales.

Automobile counters have been disappointing as sales have started falling sharply in July. The trend though partly attributable to monsoons and the rationalisation of sales-tax rates shows a declining trend. ``Ashok Leyland and Telco both touched their lows during the week and probably remain under pressure for sometime to come until the trend changes,'' said Mr. Contractor. As a consequence of the slowdown, the auto ancillary stocks are likely to be hit sharply in the coming months. Many of them like ZF Steering and Automotive Axles have reportedly a fall in their profits in the June quarter. The bearings stocks would also be adversely affected. While fundamentals continue to be strong, fund buying is not coming in. One thing that remains certain is that the rupee would have to stabilise before buying re- commences.

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