Cover story: Making Of The Sense Sensex [Pg.1]

COVER STORY
Making Of The Sense Sensex

If it's thrills and spills you are after, surf the stockmarket where even the slightest thing can trigger a violent reaction in the index. But unravelling the mystery of this unpredictability won't be easy.

By Roshni Jayakar

The closest you'll get to the impulsive behaviour of the Indian stockmarket- manifest in the conduct of that strangely sentient-sounding index, the Bombay Stock Exchange's Sensex-is something you'll find in a pedestrian subway at Mumbai's hyperactive Churchgate railway station. Like most of its kind in India, this subway boasts a unique subterranean commercial culture all its own. From time to time, the object of our discussion makes an appearance among the wares of one hawker or another infesting the warren. Mad ball, they call it (it sounds a lot better in the vernacular)-a small India rubber sphere whose selling point is unpredictable bounce. It could rebound 10 feet on the first go, two, on the second, eight on the third...

Observers of the real thing, the 30-stock sensitivity index, understand such inconsistency best. In 11 trading sessions, between September 14 and September 28, the Sensex dipped from a high of 4,763 to a low of 4,067. And unlike the random behaviour of the ball, which can be explained by merely describing the inherent characteristics of India rubber, that of the Sensex cannot be. Actually, that isn't quite true, but most explanations for index-movements are so facile that they seem too simple to be dependable.

Thus, when the Sensex climbed up 141 points to 4,173 on September 25, after touching a low of 4,032 on September 22, pundits termed it ''a relief rally''. And when it fell 83 points to 4,089 the next day (the global markets were a trifle shaky), the same pundits ascribed it to the phenomenon of globalisation of the Indian markets. All unassailable explanations; only, they seem strangely inadequate when it comes to explaining huge swings in the markets from day to day. Surely, things can't become that better in a few hours-or that worse.

If the volatility of the stockmarket frightens you, great-it should. The longest the Sensex has stuck to a trend (upward or downward) since the middle of last month has been a day (two, at most). Happenings on Dalal Street have, understandably, alarmed index-watchers like Deepak Mohoni, 46, Director, Trendswatch (India), an investment advisory firm: ''It is remarkable that the Sensex is changing direction every day. It'll be tough for this kind of thing to continue.'' Tough, not impossible; for no one knows which way the index is headed-south, below the May 1999-low of 3,700, or north, beyond 4,500.

If the unpredictability of it all terrifies you, there's reason for it to. A mere six months back, in February, 2000, the world was full of bulls (the bears were presumably hibernating late) and the Sensex was expected to touch 6,500 (some even claimed 7,000). So, where have all the bulls gone? Not very far, and some of them, like Shankar Sharma, 38, the Director of brokerage firm First Global Finance, who predicted a five-year bull run, even have a ready-defense: ''You can't live month to month. A five-year bull run doesn't mean you cannot have a year's bear run in-between. When the markets are in correction-mode it looks pretty much like a bear phase. That's what is happening now.'' May be Sharma is right and the market is just going through a bout of realism. Or may be things are really bad, what with the looming oil crisis. May be...

Can anyone tell us what's happening to an index that is suddenly displaying all the tendencies of a possessed gyroscope? Or have a mixture of investor-sentiment and speculative fervour snapped the last logical link between the index and the fundamental strengths of the companies that are part of it?

The Foreign Hand

Between tech exchange NASDAQ and the New York Stock Exchange there are five Indian stocks. No American tech-major is listed in India; and there is just one listed dotcom (skumars.com) in the country. Still, when global indices react to profit warnings from tech biggies like Intel or Oracle, or to escalating oil prices (a high of $37 a barrel on September 20), so do Indian ones. As Sharma of First Global puts it: ''Indian stocks benefited from the bull run in technology; now they will have to suffer the downside of the global tech meltdown.''

And anything that happens on the global markets impacts the behaviour of Foreign Institutional Investors, which, in turn, plays a role in the movement of local market indices. As Jay Pelosky, an analyst with Morgan Stanley Dean Witter writes in his global strategy report: We believe we are entering a moderate return environment, and expect global slowing. The return profile is likely to undergo a transformation to lower overall returns than the 14 per cent a blended portfolio returned between 1995 and 1999. We have added to bonds (US high-yield) and reduced equities in our balanced portfolio. We expect a 5-10 per cent global equity rally through the year-end, but would recommend selling into it.

When investments from FIIs-local market analysts refer to them as flows-taper off, the indices head south. And the converse, as Mihir Doshi, 39, Executive Director, JM Morgan Stanley Securities explains, hold true: ''When flows pick up, the overall sentiment changes from bearish to bullish and investors forget about the fiscal deficit or other issues.'' Most FIIs were net sellers (they sold more shares than they bought) in September: net investments (the total sum of money brought in or taken out of FIIs) stood at Rs 24 crore for the month of September (till September 23); in contrast, that for August was Rs 1,473 crore. Ajit Khandelwal, 42, a broker on the Calcutta Stock Exchange believes there's hope yet: ''FII money will start coming in aggressively when the Sensex is between 3,800 and 4,000. This will continue till early November when they start booking profits.''

Market Mechanics And Speculative Intent

Ask any broker worth his (or her) trade for an explanation of the events on Dalal Street and the term 'over-bought' is likely to figure in the answer. Elaborates Jignesh Shah, 29, Assistant Vice-President, Triumph Securities: ''The net long outstanding positions on the stockmarket increased to Rs 3,500 crore by September 20, 2000, despite the market stabilising between 4,400 and 4,600. Stock prices weren't moving up and quantities were accumulating at higher levels.'' In lay-speak that translates into an entry of retail investors into the market, as they usually do, at the height of euphoria, and at a time that institutional investors are exiting it. Put even more simply, in September shares moved from strong hands to weaker ones.

There's another, albeit slightly more technical reason for the huge outstanding position, argues Samir Dholakia, 38, Director, Balance Equity Broking: cheaper leverage. ''The cost of carrying forward scrip from one settlement period to another is about a third of what it was a year ago.'' Shorn of jargon that means the cost of not settling a transaction in one settlement period, and carrying it forward to the next has come down (which it has, from an average of 28 per cent a year, to 12 cent). The screen based trading system introduced by the BSE also makes it almost impossible to know when 'quality investors' (FIIs) are selling or buying. And data provided by the exchange shows that almost 90 per cent of the trades done in August fall under the non-delivery (speculative) category.

In the period between September 11 and September 28 the ratio of stocks that moved up (advance) to that of those who moved down (decline) went below one. Ergo, the upward mobility of the market in late August and early September, 2000, wasn't a widespread phenomenon. Almost 80 per cent of transactions on a single day involve between eight and 10 tech or media stocks. This slim list includes some good companies with sound revenue streams. And, as Ramdeo Agarwal, 40, Director, Motilal Oswal Securities explains, it includes some others: ''The base of the market has become hollow.'' The managers of funds-the other big players in the market, apart from FIIs-cannot stay away from these stocks, not without hurting their quarterly yields.

Contd..

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