ADRs, Dow crash = more trouble?

MUMBAI: Risk aversion intensified across the globe, hacking equities left, right and centre.

If the carnage continues, it could send many a country into a deflationary spiral, say experts.

The risk aversion is so high the Chicago Board Options Exchange Volatility Index, popularly known as the Vix, soared 14% to an all-time high of 53.59 at 10.30 pm India time.

Vix measures market expectation of near-term volatility as reflected in the options prices of S&P 500 stock index. It is considered one of the best barometers of sentiment.

And if the trend in American depositary receipts (ADRs) is anything to go by, the mayhem is far from over.

On Monday night, Sterlite Industries ADRs were down 15%, ICICI and HDFC Bank were down 13%, Infosys 10% as buyers went missing.

The Dow was down 550 points at 10.40 pm India time, retracting into four figures for the first time in four years.

That’s after Asia and Europe bled big time early on Monday.

The developments extinguish all hopes raised by Monday’s coordinated move by the Securities and Exchange Board of India to remove limits on participatory notes clamped down in October 2007 and an unexpected 50 basis points cash reserve ratio cut by the Reserve Bank of India.

Eleven of the 28 Sensex stocks are below the levels they were in when the Sensex had crossed 10,000 in February 2006. These include information technology majors Wipro, TCS and Infy, ICICI Bank, Tata Motors and Tata Steel.

Reliance Infrastructure, ACC and Grasim are within striking distance.

DLF and Reliance Communications, which entered the index later, closed at all-time lows around the Rs 300-mark.

Which begs the question, how much money have equity investors across the globe lost since the credit crisis began a year ago? $2.5 trillion, or Rs 120 lakh crore.

Ambareesh Baliga, vice-president, Karvy Stock Broking, said it is quite possible the market will fall even more from current levels.

“Basically people seem to have given up on the market. Foreign funds are the main sellers and they are selling because of liquidity issues. They need to close out and redeem their money. So they are not going to be looking at prices and valuations right now.”

V K Sharma, director, Anagram Stock Broking, said 90% of the money had been coming through the participatory note route to India.

“To use an analogy, one of the highways that was closed is now open. But there is a lack of appetite among foreign institutional investors,” Sharma said.

“Even locally there are no buyers. Those who had bought as the markets were falling are seeing losses. Among the people who are closing out their positions are HNIs and
retail investors.”

Baliga feels people could be closing out their positions because of the impact cost. “There won’t be any payment issues. We have a well regulated system in place and there is no froth in derivatives. There are a lot of people who are closing out their positions simply because the impact cost is going up so much,” he said.

Any transaction that is performed has an effect on the price of the scrip that wasn’t seen earlier.

“Just as an example, if you bought 1 lakh shares of Reliance then the effect on price can be as high as Rs.5 as opposed to earlier when the price changed much lesser,” Baliga said.

Going forward, says R Balakrishnan, executive director of Centrum Broking, “I don’t see any positives emerging from the earnings scenario in the next two quarters.”