The uncertainty surrounding the markets after the surprising results of the general elections led to a huge decline in traded volumes on the National Stock Exchange's derivatives segment. | |
| Average daily volume in May fell 19 per cent compared with April and 22 per cent compared with March. But interestingly, trading in index futures products has continued unabated. Average daily index futures turnover fell just 3 per cent compared with March and 6 per cent compared with April. |
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| On the contrary, trading in stock specific futures fell 33 per cent compared with March and 30 per cent compared with April. This disparity led to something very interesting - for the first time in the history of the markets, on May 14 (a day after the election results), turnover in index futures was higher than that of all stock futures contracts put together. Only earlier this year in January, index futures turnover was half that of stock futures turnover. The segment has indeed caught up very fast. |
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| Converging | | Per cent | Share in Derivatives Market | | Index
Futures | Stock
Futures | Index+Stock
Futures | | Jan-June 03 | 11.24 | 63.21 | 74.44 | | July-Dec 03 | 22.75 | 63.96 | 86.71 | | Jan 04 | 30.82 | 60.42 | 91.24 | | Feb 04 | 31.65 | 59.18 | 90.83 | | Mar 04 | 34.06 | 55.38 | 89.43 | | Apr 04 | 36.25 | 54.83 | 91.08 | | May 04 (pre-elections) | 36.97 | 50.72 | 87.69 | | May 04 (post-elections) | 45.21 | 45.71 | 90.92 |
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| One prime reason for this trend was the uncertainty in the markets post election results, which increased the need to hedge positions using the index futures market. Also, foreign institutional investors are now significant players in derivatives. |
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| On last count, they accounted for 25 per cent of the market's outstanding positions, that is, after cancelling out buy and sell positions. Put together, the share in outstanding would be around 50 per cent of the market. Strong FII participation is another reason for the increase in the popularity of index futures. |
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| Besides, margins on index futures are somewhat lower than that of most popular stock counters, and given the strong liquidity pull, even traders now flock the index futures counters. |
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| What's surprising is that the options market (index and stocks put together) still account for around 10 per cent of the market. One would have thought that the uncertainty in markets would lead to an increase in their use, but evidently Indian market players are still averse to using these products. |
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| Tata Steel |
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| Tata Steel's board has approved a bonus issue of one share for every two shares in the company, the first in 16 years. For a regular dividend paying company such s Tata Steel, handing out a bonus issue reflects confidence on the part of the management that it will be able to service a larger equity base. |
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| In this case, the equity base will increase by 50 per cent. Less than three weeks ago, the company had made its highest-ever dividend payout thanks to a 74 per cent jump in its earnings per share. But these measures haven't got the markets too excited. |
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| The Tata Steel stock has been more or less flat since the announcement of the dividend and fell around 2 per cent after the declaration of the bonus ratio. |
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| The markets are more bothered about how steel prices are behaving. In fact, this is the reason why the Tata Steel stock has fallen over 31 per cent since March, around the time when the spot price of hot rolled steel had reached its peak. |
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| After the Chinese National People's Congress called for a slowdown in investment to counter overheating in the economy, prices of iron ore and coke, major raw materials for steel, have contracted substantially. Consequently, steel prices in China have also come off quite a bit since their highs. This is the primary reason for the correction in stock price. In fact, current price levels are not much lower than the pre-election levels. |
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| But importantly, domestic steel prices have not fallen as sharply, because they hadn't tracked global steel prices when they hit peaks of $550 a tonne. And on a average, realisations are still expected to higher for Tata Steel in FY05 compared to the previous fiscal. |
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| This, coupled with a change in product mix is expected to result in a 10 per cent growth in its revenue. Just 10 per cent because volumes this financial year will be more or less flat, thanks to the company's plan to have a 100-day shutdown at a blast furnace for expansion and modernisation work. |
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| Meanwhile, despite the correction in China, steel prices have been strong in the western markets thanks to strong demand, which obviously augurs well for then company. |
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| With contributions from Mobis Philipose |
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