The straws in the wind

SMARTSHARE

The markets are mired in a slew of worries. Some domestic and a couple of them foreign, but a rising market has enabled the investors to conveniently look the other way. It would take a low tide to reveal what lies under the seemingly calm surface.

The case of the Options in the insurance business of a large two-wheeler company promoted venture was a real eye-opener and events like this are a cause of concern for the Indian markets. It is unbelievable that such a well researched company should have these undiscovered time bombs hidden in the attic.

The single biggest worry for the markets is how many more such bombs are ticking away, bidding their time. It could be specially true of all those sectors where the FDI is controlled, be it aviation, banking, insurance, retail or telecom.

This is not to cast aspersions on the honesty of the corporates but to drive home the point that there are so many wrong conclusions our analysts may have reached in terms of valuing companies, which may need to be vouched again by an anti-bomb squad.

The Chinese markets are on a rampage. They have risen 52 per cent from the February slump and 250 per cent in 17 months. This has prompted Greenspan to call it a bubble. The octogenarian is getting some bad press lately for shooting off the hip and frequently dropping words like "recession" and "bubble". But the old man knows what he is talking.

Look at the massive army of new investors that are being recruited every day. Last month alone, 4.8 million Chinese opened brokerage accounts, a rather startling increase from the slightly over three million that took the plunge in all of last year. The price-earnings ratio is pushing 50.

That China is going to blow and blow big is a given. The big question is when and how it will affect the rest of the world.

A slump in the Chinese equity markets does not make a compulsive bearish case for the international markets or our bourses directly as foreigners have been kept away from the domestic Chinese markets.

But there is an animal called sentiment, which will pull the global markets down if Chinese markets were to implode. Then there are relative valuations. Foreign investors may be willing to pay an X price for our banks, because of the Y valuations of the Chinese.

The third cause of worry is the huge primary market offerings on tap. The fourth is the mounting Open Interest (OI), which I think is slightly misplaced.

For the record, the OI at the end of Thursday's trading was Rs 64,086 crore. The highest level of OI that has ever been reached in our markets is Rs 63,586 crore, seen on January 24, 2007 with the Nifty at 4,090. The Nifty was 4,205 on Thursday. Despite a higher Nifty, the OI is less, which is not a concern.

It was May 2006 when the high OI was cited as a reason for the markets' fall at that point. Comparing the data of the two Mays, then and now, indicates that we are in a better position today than in May 2006.

Though today's OI is higher than the Rs 54,156 crore in May 2006, the ratio of Futures OI to the Total OI is 69 per cent today compared to the 82 per cent it was in May 2006, which is again less risky.

The main confidence-giving data is that despite a higher overall OI, the OI in stock Futures at Rs 29,364 crore is less than the Rs 34,784 crore seen in May 2006, when the Nifty was at 3,701. And this, mind you, is the case when there are 186 stocks in the derivatives list "" as compared to 118 at that time.

Another saving grace for the markets is that of the six-odd major corrections, 1,000 points or above, that we have seen since the current rally began in the year 2003, all of them have begun between the 5th and 17th of a month, and we are past that date.

The straws in the wind do tell us that some correction is round the corner, though not of the same magnitude that we saw in 2006.