Risk aversion could stem liquidity

SMARTSHARE

For the past six weeks, the markets have been on a one-way ticket to the moon. The Sensex has gone up from 13,946 to 15,868 and the Nifty has jumped from 4,100 to 4,647. This has come about largely on the basis of abounding liquidity, which is chasing Indian stocks.

With the expiration of the July derivatives, there is no pressure on the derivative punters to hold on against the international trends. And with risk aversion setting in, in the global markets, we could see reduction in liquidity. Mutual Funds are also not seeing net inflows.

First, a look at the liquidity. As of July 26, we have seen Rs 19,160 crore being pumped into the Indian markets this calendar year. This exceeds the inflows of Rs 36,198 crore that we had in the entire calendar year 2006. The highest FII inflow in any calendar year so far has been Rs 47,598 crore in 2005.

Last year, till July 26, we had received just Rs 11,241 crore . This year, in July itself we have received Rs 19,160 crore till date. The highest FII inflow in any single month before this was Rs 9,600 crore seen in December 2005. 
 

HOW THE MONEY FLOWED (Rs in Cr)
MONTH	FIIs	MFs
JAN	160	-1,342
FEB	2,164	-274
MARCH	1,403	-1,641
APRIL	5,534	1,032
MAY	4,575	1,848
JUNE	7,170	701
JULY	19,160	-1,863
TOTAL TO DATE	36,620	-1,539
LAST YEAR	11,241	11,605
LAST FULL YEAR	36,198	15,409

In 2006, at this time of the year, the Mutual Funds were powering the rally. They had, in fact, raked in close to Rs 11,605 crore by July 26, which was more than the Rs 11,241 crore pumped in by the FIIs. For the first time ever in their young life, the MFs were leading the FIIs.

But this year, they are a pale shadow of themselves. They have a negative inflow of around Rs 750 crore for the current year as compared to record inflows of Rs 11,350 crore last year.

The Chicago Board Options Exchange SPX Volatility Index reflects a market estimate of future volatility. It is also called the Fear Gauge. The higher the value, the higher the volatility and fear.

In the past three sessions the Index has jumped from 17.48 to 21.8, which is an 11-month high. This indicates that the traders in the US are getting jittery and this may make global investors risk-averse, cutting down on liquidity.

Mounting M&A activity, which touched $1.49 trillion in 2006, has already crossed the $1.17 trillion mark this calendar year. This activity has been largely responsible for the radiance of the global markets. If the M&A activity was to reduce for any reason, the global engine of growth for the equity markets could slow down.

The financing of two high-profile leveraged buyouts "" DaimlerChrysler AG's unit and Kohlberg Kravis Roberts' leveraged buyout of Alliance Boots Plc "" being delayed earlier this week, the sell-off in corporate bonds has accelerated across all sectors, lifting the costs of borrowing for most companies.

The trouble experienced by these companies to raise money has little to do with the fundamentals of the firms. Instead, it represents the growing determination of investors to put a higher premium on risk, after years of exponential growth in leveraged buy-outs.

As money becomes costly for the M&A deals, private equity deals could see a slowdown, which in turn could hurt the market sentiment.

To make matters worse, we are beginning the August series with a mammoth open interest of Rs 68,000 crore. This could become an issue if the markets do succumb to international pressures.

I believe that in the circumstances, we might see the flight of some capital from the markets before fresh liquidity trickles in. Do n't allow the profits to vanish.