Highest ever single day loss for sensex trading stopped at NSE & BSE as lower circuit is hit. Rs.7,00,000 cores of market capitalization wiped off in a single day at the bourses black Monday. The above are some headline taken at from leading business declines. The month of may 2006 has turned at to be cruel for investors and traders not surprising, considering the following single day declines.

• 826 points May 18,2006
• 483 points May 19,2006
• 1,111 points (May 22,2006) partial recovery later

All that scud above should not make the reader think very negative above Indian Economy. Indian economy has been performing exceedingly well in the last 3 years coming out of a very devasting drought in 2002 in many parts of India rains, consequently agriculture and other allied sectors have been on a reband since then. A record Rs.1,00,000 crores of rural savings wealth was waiting to be tapped by various savings and investment channels.

The foreign institutional investors or FII and took note of a resilient economy and made huge investments in Indian bourses. Their investments were to the tune of 8 billion Rs in 2005-2006, Rs.7 billion the year before and Rs.6 billion in 2003-04. Such huge indict allocations were inheard of till now since they knocked on Indian doors after our economy liberalized in 1991 under Mr.P.V.Narasimha Rao. Not to be left behind agricultural sector industrial economy surged a head posting 7% GDP growth. Certain sectors like capital goods, IT sector have recorded double digit growth rates. The commercial vehicle and two-wheeler companies have recorded over 30% growth.

As a very logical corollary, stocks boomed all through. From a low of 2950 for sensex, 950 for Nifty in the year 2006 to a high of 12670 for sensex in May 11,2006 (and 3650 for Nifty), it has been a very dizzying height.

The number of FIIs recorded an at the time high of 950 as per SEBI date. This comprised of not only well known as timers like morgan stantley, UBS, Deutsche bank, Warburg pincus etc but also first time investors from Japan, Korea and Arab nations. But among the investors were the much dreaded hedge funds. These funds more into every country where they see good valuations invest in them and cash out as soon as they make their profits.

These funds are supposed to have sold very heavily in May,2006. Some of them are supposed to have made a small debt in their capital too markets know very well that they do not take kindly to it.

To conceptualise shortly, Indian markets are going through a structural Bull phase since 2002. This is supposed to last a decade in the least FIIs have rated India rating, a single data enough to convince skeptics crude oil has also barrel to 74$ high in 2005 fall. i.e. markets have surged a head after digesting this major international irritant crude hurts growth, but India is a major growth engine. So, India was a darling baby of global investors.

Then, what sense to make of May, 2006 mayhem? Is Indian bull run over?

An emphatic no is the answer.

The FIIs and hedge funds have pull out money mainly becomes of higher interest rates in U.S. please note federal reserve has recently increased interest rates to 4.5% under their new governor. The above increases the reverse flow into U.S. from India of FII investments Indian stocks were no longer cheap; at least in the short run. It’s broad market in FE multiples (Forward Earnings) were 22. In comparison to its neighbours, it was costly.

As a consequence, Indian bourses have briefly lost their qlitter. While it is too early to ascertain how much money is like to have been pulled out by FIIs, it is quit obvious it must be considerable. It is not likely to be a one way bull for all times. It is the stock markets as all. What goes up, has to come down. i.e. to reasonable levels. But what is that level is the million, dollar question bunting Indian minds. A broad market FE of 15 is very reasonable. To quote a sensex target is hazardous, but a level around 8500 is very much in tune with technical indicators.

FUND BUYING in the year 2006

Date FIIs Sensex
31-Jan 3677.8 9919.89
28-Feb 11265.5 10370.24
31-Mar 17654.1 11279.96
30-Apr 18476.2 12042.56
31-May 11122.1 10398.64
30-Jun 11601.8 10609.25
31-Jul 12746.7 10743.88
21-Aug 16524.1 11511.68
Source: SEBI bulletin

FIIs and mutual funds continue to maintain a positive outlook on the markets, even though the amount of redemption continues to be higher than the amount invested in the markets post-crash.

As per SEBI data, till May 11, 2006 FIIs had invested Rs.22,243.3 crore in the Indian markets. When the markets crashed, they redeemed to the tune of Rs.10,641.50 crore by the end of June.

The markets took a positive turn in July, with FIIs turning net buyers. The investment form July till August 18 has been Rs.4,403.7 crore. “The recovery has happened, albeit not fully. There is still an amount of around Rs.6,000 crore which has been lost during the crash,” said an analyst.

P/E Ratio

2006 Nifty Sensex
1-Jan 17.16 18.37
31-Jan 17.9 18.6
28-Feb 18.27 18364
31-Mar 20.26 20.05
30-Apr 20.31 21.35
31-May 17.46 20.41
30-Jun 18.44 17.9
31-Jul 17.64 19.02
31-Aug 19.15 19.6
30-Sep 20.92 20.73
30-Oct - 21.48
Source: BSE/NSE bulletin

Even as the benchmark BSE Sensex breached the 13,000 points today, market players, in particular FIIs, cautioned beside unsteadiness. Going by SEBI data, net FII investment in equity in the period January-October 30, 2006 is $6.533 billion. It crossed the $7 billion mark if debt market numbers are added. Fresh inflow of funds from new global markets like Australia coupled with strong earnings growth reported by domestic companies lifted the Sensex above 13,000 to close at an yet another all-time high of 13,024.26.

Conclusion

Investors can pick up stocks at these levels for a growth story for long term i.e. for equities a 5 years holding period is reasonable to give a very above average return. Caution may be exercised to buy only good, well established market movers and never, to buy on margins or play intraday or dabble in derivatives market, which is high risk.

* Lecturer, Department of Commerce, Bharathiar University, Coimbatore – 46. ** Ph.D Research Scholar, Department of Commerce, Bharathiar University, Coimbatore

Reference

BSE/NSE Bulletin