Bumpy week awaits Dalal St

Markets remain susceptible to US subprime mortgage meltdown

Stock investors can expect another rollercoaster ride on Dalal Street this week as the equity markets remain vulnerable to meltdown in the US sub-prime mortgage, or high-risk home loan, markets sending ripples through global markets on fears that the fallout from the credit delinquencies could impact the US economy.

But analysts said a further fall in stock prices would present good buying opportunities in several blue chips in India. Turmoil in the US sub-prime markets has seen the benchmark Sensex lose over 1,000 points, wiping off Rs 1,98,868 crore of market capitalisation, in two weeks since July 24.

Despite the fall of the past two weeks, the Sensex is around 20 points higher than it was in April 2007. From its April 2 close, the Sensex jumped 3,400 points when it reached a high of 15,868 in the third week of July. Since then, it has fallen 1,000 points, suggesting only short-term gains have been wiped out.

Analyst confidence in the Indian markets stems from the fact that the India growth story is intact. "Right now, there is a disconnect between the stock market and the Indian economy because the factors driving the market down are primarily global," said Anil Advani, head of research at SBI Cap Securities.

The economy, he said, was "on an upward mode, but the stock market is on a retreat at the moment". "Going forward, as more information comes out on the US sub-prime problem, the market will react to it. The contagion will end when news stops coming," he added.

Cues from the US markets, which recovered from a global sell-off on Friday "" erasing most of the 213-point drop on the Dow Jones Index after the Federal Reserve added $38 billion to banks to calm the sub-prime markets "" indicate a steady opening for the domestic stock markets on Monday.

"The Indian markets should recover next week as the fundamentals are still in place, and opportunity remains," said Dharmesh Mehta, head of broking, Enam Securities Pvt Ltd.

Most of the losses in the domestic markets are due to the sell-off by global funds. This month alone, foreign institutional investors' (FIIs') net sale of stocks has been worth Rs 4,285 crore in the secondary markets, according to figures available with the Bombay Stock Exchange.

Investors, however, can draw hope from the fact that the FII sell-off has been the result of profit-booking in response to a US crisis rather than any negative developments in India.

Overall, FIIs have made good gains in the last few months. In addition, FIIs have gained from the weaker dollar, which depreciated 10 per cent against the rupee since the second half of March.

The sell-off, which has pushed down the rupee, has also made infotech stocks attractive again. "There is no panic. We do not see the Indian markets falling further. Selective mid-caps are showing better strength compared with the large caps. The long-term performance of the economy has not gone down," said Alok Kabra, country head-investment banking, Elara Capital (India) Pvt Ltd.

Market analysts, however, also suggested that the sub-prime contagion would spread to other assets and markets. "It is quite possible that the sub-prime turmoil will spread to the commodity markets in the near term. There is a possibility of some hedge funds having exposure to both the commodity and credit markets," the head of a foreign brokerage firm said.