Indian bourses will continue to face selling pressure till the end of this calendar year. The consensus among market intermediaries in the immediate term is that the indices could fall a further five per cent over the next few trading sessions, given the uncertainty on the domestic as well as the external fronts.
The market has seen an over six per cent correction since November 5, when both the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) benchmark indices touched their all-time highs of 21,004.96 and 6,338.50 points, respectively.
Fears of high-deficit European nations such as Ireland, Portugal and Spain defaulting on their loans and a slowing in China have kept the international markets on tenterhooks. The Indian bourses have also been volatile in recent sessions.
There has been some nervousness about the political scenario as well, with the 2G spectrum scam taking centre-stage. “The market sentiment is already low and any political rumour could trigger a further fall. The markets will continue to remain uncertain,” says Arun Kejriwal of advisory firm Kejriwal Research and Investment Services.
The market fall has been mainly led by largecap stocks and has already seen BSE’s market capitalisation erode by a huge margin. Over 90 per cent of the midcap stocks and 87 per cent smallcap stocks have been down in the same period. A drop in foreign institutional investor (FII) inflows is another reason why the market is expected to see a further drop.
“FIIs have invested an average of $6 billion each month for some time now, but this kind of a flow cannot be sustained continuously. So after the second round of US quantitative easing (QE2) of $600 billion, we have seen FII investment slow down,” says Dinesh Thakkar, CMD, Angel Broking.
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FIIs, which have invested $28.4 billion in the current year to date (YTD), were largely responsible for the run-up in recent months. Nonetheless, FIIs have booked profits or remained neutral in the past two weeks, which some say is on account of the year-end financial closing. According to Mihir Doshi, India CEO at Credit Suisse, the markets have had a great run and a correction is not out of the ordinary. Says he, “The sell-off hasn’t been due to any India-specific factors. Once again, there have been concerns on the global macro and European debt fronts.”
Most market players feel a further drop of another 1,200-1,500 points could only make the bourses more attractive. “India, with its economic growth and consumption story, remains an attractive investment destination. And FIIs have been investing here despite other emerging markets being available at a discount to the Indian market, which currently trades at 18-19 times its PE ratio,” says Ambareesh Baliga, VP, Karvy Stock Broking.
The same sentiment is shared by FIIs too, which feel QE2 will lead to more liquidity being pumped into emerging markets. “We remain positive on the market in the near term on the back of QE2 and a dovish Reserve Bank of India policy,” says Doshi.
This could also be a good time for long-term investors to get into the market. “A six per cent correction from the top that we have seen is a decent correction and for those who have been on the sidelines so far, these are attractive levels to pick up stocks,” says Devang Mehta, VP and head, equity sales, Anand Rathi Financial Services.