Dubai debt tests market’s depth

Local markets fell on news of Dubai World seeking to suspend repayments on all or part of its $59 billion debt, but recovered after long-term investors swarmed in, attracted by the fall in valuations.  “Value purchasing was distinctly visible, and capital has come in from fresh buyers. The firming up of the markets after the initial fall resulted in some short-covering, which has ultimately resulted in a V-shaped recovery in the day,” said Prakash Diwan, head of institutional sales and strategy at Networth Stock Broking.

“The recovery in Europe and buying at lower levels helped the recovery, but the vulnerability of the market to such news is a matter of concern,” said Saibal Ghosh, CIO at Aegon Religare Life Insurance.

Domestic institutions, including mutual funds and insurance companies, were net buyers by Rs 698.67 crore, while foreign institutional investors were net sellers by Rs 1,057.18 crore.  Dubai World, which manages investments for the Dubai government, had on Thursday sought an extension of six months on its debt obligations, effectively till May 30.

On Friday, cues from global markets had the Sensex in its highest intra-day fall since August 17, when it had dropped 671 points on weak global cues.  During the day, the Sensex fell 3.82% or 644.49 points from the opening level to the intra-day low of 16210.44. However, recovery set in shortly after 1 pm and the index closed with a 222.92 point loss at 16632.01, down 1.32% from the previous close. The Nifty closed below the 5000 mark at 4941.75.

Cues were taken from Asian markets, which were in the red, with the Kospi dropping 4.69%, the Nikkei 3.22% and the Hang Seng 4.84%. Following the recovery, European markets were trading with modest gains. US markets were closed on Thursday for thanksgiving, while Dubai will reopen only on Monday.

On the BSE, most of the punishment was reserved for the real estate sector, which fell 7.04%. Banking and metals indices also fell 5.28% and 5.69%, respectively. Recovery was strong in all three, with banking and realty falling just over 1%, while realty closed with a 0.55% loss.  The day’s top loser was IT, which shed 2.20%. Capital goods fell 1.82%, while the TECk index was down 1.63%.

The sentiment among market experts seems to suggest there is little to panic over at this point in time.
“There might be some impact on sectors, which have an exposure to the region, but at this time they are only seeking a deferment of six months. The markets were looking for a trigger as they were already trading at the upper band of the range,” said D D Sharma, senior vice-president at Anand Rathi Financial Services.

“The details that are out at this point in time do not suggest that the issue is as severe as the reaction would make it out to be. There could be some effect from the liquidity point of view, but it is unlikely to be severe,” said IV Subramanian, chief investment officer of Quantum Advisors Pvt Ltd.