BSE Sensex: And miles to go before I fall

Suresh Darji (not his real name) took the plunge into investing in Indian equity in the first week of April, when the benchmark Sensex was tantalisingly close to the 12,000 mark. A firm believer in the long-term India story, Darji brushed aside warnings of friends that valuations at these levels were stretched and that a correction was round the corner. After all, reasoned Darji, the Cassandras have been screaming about a correction since 8,000 levels; it hasn't come so far. Why should it come now, thought Darji, and went on to dump Rs 10 lakh of the cash he had just inherited into a basket of mainline Sensex stocks.

Four swift trading sessions later, Darji was poorer by a little over Rs 51,000, with his portfolio now worth Rs 9.48 lakh. After touching an all-time high of 11,930.66 points in the early trades of April 7, the Sensex went on to lose a massive 922 points in the four sessions till April 13. The Sensex ended the holiday-packed week on a weak note at 11,237.23 points, with investors' wealth on BSE eroded by over Rs 1.19 lakh crore.

Darji may have been a chastened man, but only for a few days. For, once a new week began, the indices were back to the usual grind, headed northwards in style, gaining a little over 300 points on April 17 to close at 11,540. Clearly, for Darji, and the hordes of investors who got in before him, it wasn't yet the time to replace greed with panic. As Andrew Holland, Executive Vice President, DSP Merrill Lynch, points out: "It was a simple correction. The market had run up very quickly on expectation of a 9 per cent GDP growth, and it has just come off from its high." Prior to the fall, in just 13 trading sessions, between March 21 and April 7, 2006, the bse Sensex nearly gained 1,000 points. And despite the sharp fall, the Indian market still continues to be the biggest gainer among world indices in 2006, registering a rise of 19.5 per cent.

THE INFOSYS EFFECT

Infosys: A heavy weight on the indices How big a role did Infosys' fourth quarter results-or, to be precise, the nervousness that precedes the IT bellwether's report card announcement-play in bringing down the market? Perhaps not much-not this time-considering that specific events like US-Iran tension coupled with heady valuations had a significant role to play in last fortnight's free fall. Yet, there's little doubt about the Infosys effect on Dalal Street. In the last two years, the trend on the BSE Sensex a few days before the Infosys results has been bearish in six out of the eight quarters. The reaction post-results has also been adverse in six out of the past eight quarters. The reaction to the March 2006 ended quarter results, though, was truly special, with the Sensex spurting by almost 2.7 per cent on the first trading day after the results. "Players don't want to carry a huge event risk ahead of Infosys results," says, Amitabh Chakraborty, Head (Research), BRICS, who also points out that the company holds a nearly 10 per cent weightage in the indices. The concerns are if the company posts muted results or declares disappointing guidance, it goes on to impact the benchmark index itself. Last fortnight when Infosys declared a 2.6 per cent growth in sequential earnings, and a 26.4-28.4 per cent guidance for the year ahead (plus a 1:1 bonus and a Rs 30 special dividend), the pre-results nervousness made way for no-holds-barred bliss on the first trading day post-results, with the stock zooming 7 per cent and the Sensex soaring 300 points. Infosys has delivered-this time round.

If the Indian markets have been, over the past couple of years, buoyed up by massive inflows from foreign institutional investors (FIIs), guess who was responsible for last fortnight's fall? Yes, the FIIs themselves. In seven trading sessions till April 12, 2006, FIIs were net sellers to the tune of $1.75 billion (Rs 7,712 crore), both in the cash and futures and options (F&O) market. Of the total sales of Rs 7,099 crore in futures, Rs 5,220 crore (almost 74 per cent) has been sold in stock futures. Net selling in the cash segment was to the tune of Rs 613 crore. "With the FII liquidity tap drying, the markets were bound to fall," says Ambareesh Baliga, Vice-President, Karvy Stockbroking. "Despite overstretched valuations, the domestic funds that were sitting on the fence pumped in money on concerns that they would miss the rally. This cycle of sustained money inflow from foreign and domestic funds lifted the market to uncharted territory and once the cycle broke, the correction took place," is Baliga's explanation for the break in the dream run. "Positions were also trimmed ahead of the large IPOs lined up by companies like Reliance Petroleum (Rs 8,100 crore) and Parsvnath Developers (Rs 1,500 crore)," adds Gurunath Mudlapur, Managing Director, Atherstone Institute of Research. Rising crude oil prices, hovering above the $70 (Rs 3,150)-mark per barrel, concerns over reports of us threatening to bomb Iran's underground nuclear plant, rising interest rates and high commodity prices are the other reasons for the fall in the domestic market. "Unlike Iraq, Iran is a theocratic state and any unprecedented event between the US and Iran will impact the world economy," says U.R. Bhat, MD, Dalton Capital Advisors.

Yet, if you want to look for reasons for the correction, you will always find them. The short point, though is that a correction was a long time coming, and as Bhat adds, it's "healthy. The correction gives new players an opportunity to enter the market. I still feel there is ample appetite for new money to be absorbed by way of public offerings as well as by the secondary market". Darji's faith in the India story isn't without substance, and he will most likely make money if he sticks around on Dalal Street for a couple of years. But the fairy tale might have reached its final chapters for punters looking for a quick bang for their bucks.