Market to settle soon

By G. S. Roongta

The BSE Sensex, which had tanked by 891 points in the previous week, continued to move in a jittery manner last week on the back of weak global cues.

On Monday, 8 August 2011, it witnessed a panic like situation as the best dump stock and the Sensex crash to hit low of 16759.45 to a loss of 546.62 points in the face of all round selling in the first one and half hours. Later by 1 p.m., it recovered after almost 488 points after the European markets opened and the statements of the Finance Minister (FM), Mr. Pranab Mukherjee and the deputy chairman of the Planning Commission, Mr. Montek Singh Ahluwalia.

The FM had emphasized that India’s growth story is intact and the country’s economic fundamentals are strong enough to withstand this crisis. He felt that the impact of the global meltdown will be there but it will not be as negative as made out by many people.

Similarly, Mr. Ahluwalia felt that India’s GDP growth between 8 – 8.2%, as forecast earlier, will be among the highest in the world.

The overheated markets breathed easy after these statements as they drew comfort from them and started recovering fast when they found that the UK market had opened in the green. Accordingly, it scaled back 4880 points out of the 546.62 points that it had lost in the first 90 minutes of trading. A fresh round of selling thereafter led the Sensex to close the day at 16990.18 with a loss of 315.69 points. The CNX Nifty followed suit to end day at 5118.50, which was its worst closing in 2011.

The FIIs, who had unloaded stocks worth Rs.1610 crore on Friday, 5 August 2011, continued to be net sellers with the same zeal on Monday, 8 August 2011. The domestic institutional investors, however, lent support to the market and bought stocks of an equivalent amount thereby neutralizing the selling pressure of the FIIs. LIC particularly bought heavily after 2 p.m., which helped the market recover by over 400 points.

Both the USA & UK are facing a debt crisis with slowdowns in their economies and the situation is indeed grave and worrisome. But the hopes of the US economy recovering from the financial crisis of 2008 were sadly belied as the rating agency, Standard & Poor’s (S&P), downgraded the US Treasury Bonds from AAA to AA+ on Friday, 5 August 2011, which dealt a severe blow to the US financial system and triggered a panic button in global markets. Accordingly, Asian markets too turned weak on Friday, 5 August 2011 and opened distinctly weak on Monday, 8 August 2011 and the Indian bourses were no exception.

On Tuesday, 9 August 2011, the Sensex made a low of 16432 with a loss of 558.18 points in intra-day trades while the Nifty breached the 5000 level and hit a low of 4946.45 as the Dow Jones was trading excessively in the red in the noon session and the FTSE of the UK, which had opened slightly better, pared all the gains and slipped into the red by over 100 points in the late afternoon session. Thus the FTSE index, which was about 100 points plus over the Nifty a week earlier, fell at par or slightly below the Nifty indicating excessive weakness. The FIIs continued to press heavy sales worth Rs.1110 crore on 8 & 9 August 2011 taking their total sales to over US $1 billion till 9 August 2011 over the past three trading sessions.

According to me, the market had overreacted to the downgrading of US treasury bonds as I pointed out to the Editor of Money Times when he called me to seek my reaction to Mr. Rakesh Jhunjhunwala’s bearish outlook in the short-to-medium-term when he advised against bottom fishing. In his TV interview on a leading channel on Tuesday, 9 August 2011, he was very categorical that he is bullish in the long-term but not so sure about the short-to-medium-term looking to the crisis in the USA & Europe. As against this, I express my view that the markets will bounce back in a day or two as they had overreacted to the S&P’s downgrading of US bonds, which had washed away about 20% of the market capitalization or over Rs.3,00,000 crore in just three days! My assessment proved right as the Sensex recovered 272 points the very next day on Wednesday, 10 August 2011.

In my view, the market behaviour was absurd as it seemed to overlook the other positive factors like the fall in crude prices by US $20 from US $98 earlier to US $78 on Tuesday, 9 August 2011. Metal prices, too, fell under the leadership of copper, which should have had a salutary effect on the indices. Is it not ironical that the markets used to react sharply on rising crude prices or inflation but were indifferent to the fall in crude prices and other commodities, which was bound to contain inflation? How can the markets react negatively in both situations, which are diametrically opposite each other? As stated last week, another irony is that stock prices tumble even if the companies have posted better earnings.

Whenever the market overlooks basic fundamentals because of excessive speculation, it opens the door for further wrongs that develop into an uncontrollable level and result in scams as witnessed earlier in the years 1992 and 2000. The authorities must, therefore, ensure that excessive speculation does not destroy our markets this time.

Currently, stocks of many companies are available at P/E multiples of between 5 to 8 as against 12 to 15 on the lower side for mid caps and 22 to 25 for blue chips earlier. Some of the few growth oriented companies are 3i Infotech available at a P/E of 2.6, Aban Offshore at 4.62, Allahabad Bank at 6.25, Alok Industries at 4.21, Andhra Bank at 5.5, Canara Bank at 5.2, Escorts Ltd. at 6.2, JSW Steel at 7, Andhra Sugars at 5.8, Ashok Leyland at 10.2, Garden Silk Mills at 3.8, Eimco Elecon at 8.1, GSFC at 3.9, Graphite India at 9, HEG at 7.5, Phillips Carbon Black at 3.8, Sathavahana Ispat at 2.8, SRF Ltd. at 3.6. Even blue chip companies like Tata Steel are available at a P/E multiple of 5.2.

Elecon Engineering, Sarda Energy, Grasim, Mafatlal Industries, Sesa Goa, KSB Pumps, Suryaamba Spinning, etc. are part of a list of 200 companies whose stock prices are dirt cheap compared to their earning strength. These companies are all growth oriented, professionally managed with consistent track record of dividend distribution.

But most of these stocks are overlooked in the pursuit of quick profits driven by market speculators even though their P/E multiples are higher than illustrated above. For example, ABB commands a P/E ratio of 145, Bombay Dyeing at 104, Ranbaxy at 56, Fortis at 52, Titan at 40, Asian Paints at 35, Colgate at 35, Siemens at 35, Reliance Power at 34, VIP Industries at 34. Yet they command a high level of trading because the punters are active on these counters. What is even more shocking is that Dish TV, Jet Airways and Max India with negative earnings and P/E ratios are still heavily traded due to speculative support!

Thus, as I have repeatedly stated, there is great distortion in the market between the share prices of good and growth oriented stocks and speculative picks. The market, it seems, cannot distinguish between quality and quantity leading to this anomaly. Investors should, therefore, see through this game in the market and select quality stocks rather than foolishly chase stocks that are hyped by the brokers or the media at the instance of operators. Till the excessive speculation is controlled, the market will continue to experience panic conditions as witnessed last week.

The 71 points loss on the Sensex on Thursday, 11 August 2011, appeared very marginal compared to previous four days and in keeping with my assessment of the market settling down soon. But once again, the operators and speculators were at their games when the Sensex crashed by 219.77 points on Friday, 12 August 2011, to close the week at 16839 in the face of positive IIP numbers and the fact that the European markets were in the green. This, once again, clearly establishes that our markets do not function on the basis of fundamental or economic logic and play to the tune of money power to fool common investors time and again.

Money Times readers should dwell on these points and not get carried away by rumour mongers or the media, which tends to report on what the rich & powerful state without caring to analyse their underlying motives. Stocks identified by our Investment Advisory Service (IAS) or in this column should be held on to as the market is sure to regain the Sensex 18000 or Nifty 5400 levels in the next few weeks.