Choppy season begins

There won’t be any more fireworks on Dalal Street for some time.

After the initial fireworks that propelled the market to beyond the 20,000 mark in end-October, things have suddenly taken a volatile turn. At the time of writing the BSE’s benchmark index, the Sensex, had tumbled 7.4 per cent since the peak, plummeting 1,500 points in merely nine trading sessions.

The market’s big players, the foreign institutional investors (FIIs), who were bullish till just a fortnight ago, have been pulling out of the market. Is this bull market finally seeing a long-drawn correction or is this just a temporary blip in the India story?

A confluence of factors is weighing the bulls down, and experts reckon they are not going to go away in a hurry (the negative factors, not the bulls).

The curbs on participatory notes (P-notes, which are derivate instruments that were issued to unregistered foreign investors) slapped by the Securities & Exchange Board of India (SEBI) have had a negative effect on foreign inflows. FIIs had pulled out $237.9 million (Rs 951.6 crore) in the first week of November; this outflow is in sharp contrast to the whopping net investment of $9 billion (Rs 36,000 crore) the previous two months.

Secondly, a series of bad tidings from the US housing sector and its mounting sub-prime losses are threatening to derail the US economy and push it into a recession. As a result, the global markets have been battered as the risk-appetite of equities has begun to wane. Crude oil has soared to $98 per barrel and gold prices have increased to over $816 per ounce, even as the US dollar declines against major currencies, as investors hedge with dollar-backed commodities.

An increase in the number of downgrades by equity analysts, as more and more stocks enter an overvalued zone, has contributed further to the Sensex slide. For instance, Reliance Petroleum, the darling of the bourses till recently— it surged 85 per cent in just a month—was given a thumbs-down by foreign brokerage CLSA. Result? The stock plunged over 47 per cent in just a day.

The silver lining? Mid- and small-cap stocks haven’t been battered as much. In fact, since the beginning of November, the BSE’s mid-cap index lost just 0.4 per cent, while the small-cap barometer gained 1.16 per cent. The second quarter results of Sensex companies were also ahead of the street’s expectations by about 10 per cent, and analysts have increased their earnings guidance for the current year.

Even after the correction, valuations still look rich, with the Sensex quoting at a forward priceearnings ratio (P/E) of 20.5 for fiscal 2008. But that may not appear out of whack with an economy that’s expected to nudge the 9 per cent mark, and a corporate sector that’s expected to turn out robust earnings. The tumble, reckon experts, is a long overdue correction. Says Sandesh Kirkere, CEO, Kotak Mutual Fund: “The market had a strong run up from 15,000 to 20,000 in just about two months, so there was bound to be a correction.” For the moment, though, there aren’t any positive cues on the horizon to take the market forward, and global uncertainty looms large. Enjoy the breather—till it lasts.