Bombay: Signs Of Distress
CLSA feels Nifty at 3500 and Sensex 12000 are now a distinct possibility. Is it possible or probable?FIIs sold roughly a billion US dollars worth of stocks in the past fortnight, ignoring good days and bad days, ignoring gap-up or gap-down openings and this status remained on Friday as well with net sales that exceeded Rs 700 crore on a day, that saw a plunge of over 600Sensex points.
Someone is either totally in distress, or there is something more than Oil price, which is forcing the hand of weak or leveraged to pull out money at any costs. However, the structural damage that this type of selling has done to the market is that most die-hard investors would have already reduced the NAVs of their portfolios by 5 per cent even before start of trading on Monday June 30th, 2008.
A lot of market watchers and commentators have argued that Domestic Institutional Investors are acting as a strong bulwark to foreign selling but they seem to be wrong. Between January 9, 2008 and Friday June 27th, 2008, the Sensex has lost more than 7000 points or nearly 35 per cent of its value.
For a market that was being valued at a trifle above $ 1 trillion in January 2008, this is a erosion of $ 350 bn in market cap. Obviously, this is the amount of money that collectively the GOI, promoters, Mutual Funds and Retail Investors have lost, and should be getting reflected in personal wealth or MF portfolios. The DIIs thus have not been protectors of Capital, but have equally participated in this wanton destruction of Wealth.
A lot has been said about the cash hordes in excess of $ 3 bn that Mutual Funds have been holding on to for the past six months, and this writers gut feel is that this cash chest should be almost over by now or may at best last another fortnight. After which a swift and unhindered slide of the Sensex to 12000 and the Nifty to 3500 should become possible.
Collapse of the Nuclear Treaty with the US, and coinciding of General Elections with 6 State Elections in Autumn, and continued Stratospheric Oil prices will mean that the Sensex then moves to a level of 9000 towards the year-a level which was last seen 3 years ago.
Given the parabolic oil risk and the Indian market’s gearing to foreign selling, this is not an extreme possibility. Foreigners have so far sold a net US$6.2bn worth of Indian stocks this year, based on FII data, having bought a net US$51bn between the beginning of 2003 and the end of 2007.
FII holdings were worth $ 250 bn in January 2008, and with the 35 per cent fall since should be worth atleast $ 150 to $ 160 bn even now. Probably, all investors may not be making money or may not be Selling Out India but Investors with Exponential gains on the portfolio, and Hedge Funds carrying leveraged positions may still not be late in Selling.
At $ 150 mn a day, the FIIs can continue Selling for the next three years and still not be able to pull their money out of India. This is what they have been doing in Korea-selling for the past three years and have led to a severe under-performance of the Seoul markets amongst Asian markets in the past 5 years.
A similar fate can lie in store for India, and we could easily reach the same level of 950 for the Nifty and 3000 for the Sensex, from where we had started 5 years ago, without there having been a significant fundamental change in the Economic performance except that PE multiples would have gotten down to single digits.
There is a clear risk that foreigners sell more, even as asset prices decline. This is tricky for Emerging Nations like India which are built with Portfolio flows. Suddenly the RBI may realise that the $ 310 bn in Fx Reserves is not enough to stave off a Portfolio outflow, the Rupee will plunge to unheard levels even as RBI raises interest rates to protect the Rupee from onslaught.
The Result will be "empty coffers" and "inflation" in the high 20s, double of the present number dished out by North Block. The only place to hide would be out of Equity and into Commodities and Cash. Commodities being at speculative highs is out of the question. But cash seems the best possible outcome.
Safe Harbor Statement:
Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.
No comments:
Post a Comment