Post by bhumika on Jun 9, 2006 10:31:53 GMT 5.5
Seven reasons for the Sensex rampage
D. Murali
Suresh Parthasarathy
One more day of falls. That's not how one describes the way markets moved on June 6. For, a Sensex dip that shattered the psychological five-digit mark is better clothed with words such as tanking and slipping, plunging and correcting, sliding and shedding.
To add drama, though, you may need to bank on phrases like `savage correction,' `massacre of the markets,' `bloodbath on the bourses,' and `freefall nosedive.' But, if you're asking `why', here's a zero base to help.
First reason, according to many, is the interest rate hike in the US by the Federal Reserve a.k.a. Fed. Its Chairman's statements are always listened to with great interest and trepidation, even when they aren't about interest. For instance, Ben S. Bernanke, the successor to Alan Greenspan, said on June 5, "It is reasonably clear that the US economy is entering a period of transition," according to the text on www.federalreserve.gov. "A sustainable, non-inflationary expansion is likely to involve some moderation in the growth of economic activity to a rate more consistent with the expansion of the nation's underlying productive capacity," he added.
The best way to prevent increases in energy and commodity prices from leading to persistently higher rates of inflation is by anchoring the public's long-term inflation expectations, said the Fed chief.
But, citing Bernanke's pledge to remain vigilant on inflation, a Reuters story `1 hour ago,' informs that European shares are down on interest hike worries.
Second reason comes with a clang: Metals. "Here's metal more attractive," says Hamlet, but hedge funds are seeing `metals meltdown,' informs www.hedgeco.net in a June 1 report. "May has seen tough trading conditions that may mark the end of earning easy money," it rues. "Metal prices at the London Metal Exchange have witnessed choppy trading throughout the week, the BSE Metal Index lost 22 per cent since last Monday." It seems `Meltdown May' is a catchphrase with weary traders and managers! Alex Akesson cites investors and researchers to say that many of the world's roughly 8,000 hedge funds "lost between 3 and 6 per cent in the first three weeks of May with some having seen swings of 10 per cent or more."
Third is the problem of higher valuation. That is, what according to you seems good, as a healthily bubbling Sensex growth, may be viewed by another as high. For example, in a June 1 story, news.moneycontrol.com speaks about Nomura's report that pegs the Sensex fair value to 7,000 points! "The report starts with an interesting code; it says, `Never insult an alligator until you cross the river.'"
Quote? Or, perhaps, code, with hidden meanings? In a May 23 report, www.siliconindia.com cites Franklin Templeton's Mark Mobius and Mark Faber for their keenness to invest in Indian equities for their long term potential, "but only if the valuation is cheaper."
Fourth reason, the attraction of other markets. "How do other emerging markets look to you?" is a question that Eoin Treacy, Global Strategist from Fullermoney.com takes on from MoneyControl. "Because the emerging markets have been liquidity driven and we are seeing attraction of liquidity in the US and Japan right now, along with a certain amount of inflation scare, a lot of these emerging markets have pulled back," he answers. Worryingly, "India has pulled back more because it had gone up so much." Reassuringly, however, "Over a very long-term, India will probably outperform markets like Brazil and Russia."
Fifth is the inimitable taxman who comes off and on with a missive. One such was the CBDT circular on the fifteen commandments on how to differentiate a trader from an investor. To compound investors' worries there were statements from the Finance Minister, not only interpreting tax law but also giving health bulletins about the economy.
Sixth reason, a powerful one, is the selling by the FIIs or foreign institutional investors. It is no longer a secret that they have been net sellers since May 10, happily booking profits in emerging markets. Distressing numbers are that the FII outflow adds to Rs 8,200 crore and ticking, more than offsetting the MF (mutual fund) inflows of Rs 7,500 crore for May. MFs are said to be scraping the bottom of their kitty, having run out of funds to deploy in the bourses.
Seventh reason is the much-maligned margin trading, though this now seems to be a minor irritant compared to mammoth fears.
For novices, there was an article in these columns on the topic (`Margin is a leverage that cuts both ways,' May 24).
"Let reason rule things worthy blame," sings Shakespeare. So too, we can stack up more reasons, sleuthing for causes behind the Sensex rampage. Such as, higher than expected hike in petrol and diesel, higher current account deficit, and the highest P/E (price earnings) ratio in the world and so on.
But those hunting for reasons on why the index fell the way it did have a sobering snatch in a sonnet of the Bard: "Past reason hunted, and no sooner had past reason hated, as a swallow'd bait on purpose laid to make the taker mad." And, he'd add: "A bliss in proof, and proved, a very woe."
D. Murali
Suresh Parthasarathy
One more day of falls. That's not how one describes the way markets moved on June 6. For, a Sensex dip that shattered the psychological five-digit mark is better clothed with words such as tanking and slipping, plunging and correcting, sliding and shedding.
To add drama, though, you may need to bank on phrases like `savage correction,' `massacre of the markets,' `bloodbath on the bourses,' and `freefall nosedive.' But, if you're asking `why', here's a zero base to help.
First reason, according to many, is the interest rate hike in the US by the Federal Reserve a.k.a. Fed. Its Chairman's statements are always listened to with great interest and trepidation, even when they aren't about interest. For instance, Ben S. Bernanke, the successor to Alan Greenspan, said on June 5, "It is reasonably clear that the US economy is entering a period of transition," according to the text on www.federalreserve.gov. "A sustainable, non-inflationary expansion is likely to involve some moderation in the growth of economic activity to a rate more consistent with the expansion of the nation's underlying productive capacity," he added.
The best way to prevent increases in energy and commodity prices from leading to persistently higher rates of inflation is by anchoring the public's long-term inflation expectations, said the Fed chief.
But, citing Bernanke's pledge to remain vigilant on inflation, a Reuters story `1 hour ago,' informs that European shares are down on interest hike worries.
Second reason comes with a clang: Metals. "Here's metal more attractive," says Hamlet, but hedge funds are seeing `metals meltdown,' informs www.hedgeco.net in a June 1 report. "May has seen tough trading conditions that may mark the end of earning easy money," it rues. "Metal prices at the London Metal Exchange have witnessed choppy trading throughout the week, the BSE Metal Index lost 22 per cent since last Monday." It seems `Meltdown May' is a catchphrase with weary traders and managers! Alex Akesson cites investors and researchers to say that many of the world's roughly 8,000 hedge funds "lost between 3 and 6 per cent in the first three weeks of May with some having seen swings of 10 per cent or more."
Third is the problem of higher valuation. That is, what according to you seems good, as a healthily bubbling Sensex growth, may be viewed by another as high. For example, in a June 1 story, news.moneycontrol.com speaks about Nomura's report that pegs the Sensex fair value to 7,000 points! "The report starts with an interesting code; it says, `Never insult an alligator until you cross the river.'"
Quote? Or, perhaps, code, with hidden meanings? In a May 23 report, www.siliconindia.com cites Franklin Templeton's Mark Mobius and Mark Faber for their keenness to invest in Indian equities for their long term potential, "but only if the valuation is cheaper."
Fourth reason, the attraction of other markets. "How do other emerging markets look to you?" is a question that Eoin Treacy, Global Strategist from Fullermoney.com takes on from MoneyControl. "Because the emerging markets have been liquidity driven and we are seeing attraction of liquidity in the US and Japan right now, along with a certain amount of inflation scare, a lot of these emerging markets have pulled back," he answers. Worryingly, "India has pulled back more because it had gone up so much." Reassuringly, however, "Over a very long-term, India will probably outperform markets like Brazil and Russia."
Fifth is the inimitable taxman who comes off and on with a missive. One such was the CBDT circular on the fifteen commandments on how to differentiate a trader from an investor. To compound investors' worries there were statements from the Finance Minister, not only interpreting tax law but also giving health bulletins about the economy.
Sixth reason, a powerful one, is the selling by the FIIs or foreign institutional investors. It is no longer a secret that they have been net sellers since May 10, happily booking profits in emerging markets. Distressing numbers are that the FII outflow adds to Rs 8,200 crore and ticking, more than offsetting the MF (mutual fund) inflows of Rs 7,500 crore for May. MFs are said to be scraping the bottom of their kitty, having run out of funds to deploy in the bourses.
Seventh reason is the much-maligned margin trading, though this now seems to be a minor irritant compared to mammoth fears.
For novices, there was an article in these columns on the topic (`Margin is a leverage that cuts both ways,' May 24).
"Let reason rule things worthy blame," sings Shakespeare. So too, we can stack up more reasons, sleuthing for causes behind the Sensex rampage. Such as, higher than expected hike in petrol and diesel, higher current account deficit, and the highest P/E (price earnings) ratio in the world and so on.
But those hunting for reasons on why the index fell the way it did have a sobering snatch in a sonnet of the Bard: "Past reason hunted, and no sooner had past reason hated, as a swallow'd bait on purpose laid to make the taker mad." And, he'd add: "A bliss in proof, and proved, a very woe."