The Bombay Stock Exchange Sensex saw its steepest fall this year, crashing 348.20 points and ending a relatively steady run-up since the New Year.
MUMBAI: Bears pulled the plug on Monday, pushing the stock markets into a free fall. The Bombay Stock Exchange Sensex saw its steepest fall this year, crashing 348.20 points and ending a relatively steady run-up since the New Year. The index closed at 14,191.
Two factors have been spooking the markets: India Inc’s debt-financed multi-billion dollar M&A deals and inflation, which is pushing interest rates higher. Not surprisingly, the big crashes were in metal, banking and realty stocks. The pre-budget rally this year has gone missing this year.
“The fall of the last two trading sessions clearly shows that we were never in a pre-budget rally, but were just following the global trend. Also, the decline in India has been far more severe than other Asian markets, once again suggesting that our markets are a lot more volatile on the way down,” said Deepak Mohoni, managing director of trendwatchindia.com.
He said a fall below 14,050 would indicate that this decline is the start of an intermediate (medium-term) downtrend for the market. “If such a downtrend is confirmed, it could take a week or two for it to bottom out,” added Mohoni. Monday’s drop was the 24th time in its history when the Sensex fell more than 300 points in a single day.
Tuesday will thus be a critical day, admits MR Shashibhushan, head of retail equity at IL&FS Investsmart. “If buying comes in, the Nifty should sustain above the 4,020 mark; but if, for some reason, it falls below that, one has to be very cautious and unwind long positions to ensure one does not get caught in the spiral effect of leveraged positions,” said Shashibhushan. Incidentally, the Nifty closed down 3.08% to end Friday at 4,058.30.
The mega deals that India Inc has been sewing up overseas triggered some of the negative sentiments. Though no one doubts the long-term benefits that these acquisitions would bring, market participants are worried about the short-term.
“The market was not prepared to accept the fact that Indian corporates can absorb the huge debts they are creating to acquire companies larger than their own size,” said a post-market research report from Sharekhan. The research and broking house was referring to the recent $12 billion acquisition of Anglo-Dutch steelmaker Corus by Tata
Steel, and the Aditya Birla group’s $6 billion takeover of the world’s largest aluminium-rolled products company Novelis, on Sunday. Hindalco, the Aditya Birla-group company that snapped up Novelis, was down 13.74% on the Bombay Stock Exchange.
Another factor playing on the market has been the acceleration in the inflation rate. For the week ended January 27, 2007, it grew at a two-year high of 6.58%.
“The trigger for a fall existed from Friday, when inflation numbers were declared. Fears of inflation, and hence higher interest rates, saw stocks in general, and realty stocks in particular, take a plunge,” said Ambareesh Baliga, vice-president at Karvy Stock Broking. The 26 real estate companies that DNA Money analysed were down between 4% and 19% on Monday.
“If we look at the way banks have been announcing interest rate hikes, there is a big concern on escalating home loan costs. The entire banking sector is not looking as favourable as it was six to eight months ago. At the grassroots level, the common man’s equated monthly instalment has gone up by around 30% on conservative estimates. Besides, cement prices have gone up, which has pushed up input costs for the construction sector. All these have impacted realty stocks in the last four trading sessions,” said Shashibhushan of IL&FS Investsmart.
For people with a longer term outlook, here’s an insight from Mohoni. “If the Sensex goes below 12,800, an end to the bull market would be signalled. Otherwise, the fall would be just another bull market correction,” he said. Meanwhile, trading was suspended in shares of Hutchison Telecommunications International in Hong Kong, “pending the release of an announcement regarding a very substantial disposal”, the company said in a statement to the Hong Kong Stock Exchange. Vodafone shares hit a 52-week high of 151.75 on the London Stock Exchange after the deal was announced.
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