The Hindu Business Line : Equities may fall on `risk' notion

IT is not so much of a demand and supply issue or of price discovery, but of a crisis of confidence. Does the Friday's fall suggest that the recent swing that perched the Indian benchmark index at 6,900 points level was a freak wave? Was the remarkable single-day fall an over-reaction?

It is pointless to search for answers to these questions as the reality at hand never identically repeats itself. That does not mean that the market developments do not throw up a trend.

Of course, there were global groundswell, but its timing and exact impact on Dalal Street had remained in the realm of conjecture.

The road ahead could lead domestic equities further downhill. The domestic market markers would find it difficult to keep the valuation afloat simply because the risk perception has gone up further. Since the last week of March, premonitions of this sort of reality were aired in this column.

As things stand now, FIIs have not turned net negative in terms of investments in Indian equities on weekly basis. But it is clear that the Indian market is not cheap compared to many in the emerging markets.

The MSCI India weightage is at 6.5, but overseas investors so far had gone ahead and their average weightage is hovering around 8 plus. It would be impractical to expect that FIIs would further overweight on India in short-term. The global economic growth course and the role of China and India in it are constantly being monitored.

Last week represented a shift basics, be it US economic growth, China's much talked about slowing down measures or more instances of accounting frauds in Japan.

In this changing environ, it is also unlikely that they would go underweight on India in a huff. Even turning India neutral-weight in a short time by the majority of the global investors appears remote. The most likely scenario for FIIs this week is that they would continue with the current ambivalence.

What is the over-riding compulsion for them to stay invested in India? The 6.5 per cent GDP growth rate is likely to serve as the magnate and not the corporate quarterly results, guidance or growth prospects. (Chinese stock market or the Russian equities are not compelling despite their good GDP growth rates, but because of serious market related problems.) There are certain markets within the emerging category that are fetching 5 to 10 P/E multiple, but the GDP growth cushion is not in their favour for medium to long-term investment strategy. On a comparative scale, Indian equities may be valued higher than many, but seen in the context of country's growth trajectory and risk perception, returns difference may continue to be overlooked.

However, to suggest that last week's sharp fall makes it compelling for the FIIs to make fresh investments, would be simplistic. On the other hand, the domestic investors, who had turned buyers early this month, keep speculating whether benchmark indices have reached the bottom.

The low volume and nervousness indicate wavering domestic investors' conviction. Without the leadership of the foreign investors, the domestic market makers are understandably a cagey lot. Though many of them preached that it is an opportunity for buying, very few are likely to put it into practice.

A significant fall in global prices for metals, oil and flat-to-negative outlook for IT services in the immediate term seem to have taken domestic players by surprise. Their impact on the domestic corporate income would be varied and not necessarily negative in the coming quarters.

The Friday's secular fall found an unreasonable scapegoat in Infosy's flat guidance for the current quarter. The oil and metals price decline become an omnibus excuse for fall in stock prices across the sectors.

Last week's developments may in fact prove beneficial for certain sectoral stocks. But, conviction is low and liquidity is slim, confidence is shaken. Small technical bounce-backs ahead might not be enough to pull the sentiment out of the present valuation quicksand until strong hands reach out and buy.

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