Much of the brunt of the recent selloffs was borne by index stocks. CNBC-TV18 reports on where this leaves them from their recent highs and whether this is the time to do some bottom fishing.

The market has corrected 10% since the recent selloff, from July 26, and a lot of people are wondering whether the bottom has been reached or whether there are further highs to be reached. While the debate rages on, there are a lot of stocks which could be in the running for bottom fishing and people have been talking about buying in dips.

Analysts said that the Sensex has corrected about 10%, since July 26, and the midcap index corrected about 8%. The smallcap index, which was a relative underperformer in the year, has corrected only about 5.5%, while the realty space has taken a beating and corrected about 15%, in the recent 15-16 trading sessions. The auto, capital goods and oil and gas space corrected in line with the Sensex.

With regard to the frontline index stocks, Reliance has corrected about 10%, ONGC has taken a beating and corrected about 17%, whereas stocks like Reliance Communications, Bharti and ICICI Bank have all corrected between 13-14%.

From the other largecap stocks, DLF has corrected about 8%. Unitech has taken a significant beating from the realty space and has corrected about 18%. Reliance Capital, which had an amazing rally over the year, has corrected about 22%.

Some of the smallcap stocks have however seen mixed variation. For example-Assam Company has been up 50% despite the recent correction. However, Arvind Mills has taken a beating and is down about 15%. Triveni Engineering was up about 22% in the last 16 trading sessions, whereas SRF is down about 12%.

So, there are huge variations in the smallcap space, commented analysts. Most of the smallcap stocks are up about 4-5% today and ICICI Bank seems to have taken the cue and is up about 4.5% in today’s intraday market.

According to analysts, there is a lot of opportunites for bottomfishing, but there will still be the debate whether the bottom has been reached.

US Federal reserve chairman Ben Bernanke’s surprise move to infuse more liquidity on Friday has sent markets across the world soaring. On Friday, US stocks clocked their first upmove in 7 sessions, and today, markets across Asia, including India, got off to a solid session. Despite some pressure from profit booking, indices managed to hold on to most of their early gains. The Nifty had gained nearly 150 points in early trade, but closed 101 points higher at 4,209. The Sensex, which had surged over 500 points in early trade, finally closed 286 points higher at 14,427.

Shashank Khade of Kotak Securities has a view that the semblance between fundamentals and valuations was completely lost during the midday crash, which was seen on Friday. “One doesn’t really know how the political equations will unfold. But ofcourse the initial indications were the pulling down of the government and nobody wants elections right away. That clearly gives a sense that this government would last further for sure” he feels.

He adds that this political upheaval would be something for investors to wait and watch. Therefore, this sort of corrections and the bounce back will not be swift to a large extent as people would want to take time for the markets to get back their semblance to a large extent. “So one-day rise in the US markets or for that matter the Asian markets doesn’t really change perspective to a large extent. I think we have had a straight run for last 3-4 months. The Indian market correcting in this month was something, which was due for sometime. In fact from 20th to 27th of July was when we had really hit most of the highs for our stocks for the large cap stocks. It has been 20 days since we have been in a correction mode” he adds.

Experts think that the market is giving good opportunities to buy at every dip. as some of the stocks have fallen by 5-10%. That gives us a good opportunity to enter the market and use this entire volatility as an opportunity. Therefore experts are not really concerned if the market could fall by another 3-5% further from these levels.

However, there are some concerns regarding the Left's support to the Indo-US nuclear deal and reports that it might withdraw support to the UPA government. So, will investors use this rally to lighten or exit positions?

Prasun Gajri, Senior Vice-President and Head-Investments, Tata AIG, said the political turmoil would cause short-term uncertainty in the market. “It will cause short-term uncertainty in the market and we could see some losses. When the poll results came out last time, the markets went down purely because the markets did not like the combination of the government. Eventually, the markets recovered after that brief period. If we see mid-term polls, what’s the worse that can happen? I don’t think the government in broad can change any policies, which drive the market today. I am not too concerned about any mid-term polls. Yes, they will cause some volatility but if you are a long-term investor, one has to look at that as an opportunity rather than as problem area for the moment,” he added.

The ongoing sell-off in the stock market marks the eighth market correction that has interrupted the Sensex’s four-year rally. The current decline, which has seen the benchmark index fall about 12 per cent since July 24, is part of the global market meltdown, as the US’ “sub-prime” problems threaten to become a widespread epidemic. There is nothing yet to suggest that Indian companies will be directly affected by the sub-prime contagion. But the inf luence of global events on the Indian stock market performance has been steadily growing as foreign inflows have largely provided the liquidity that fuels the bull market.

How should Indian equity investors view the markets’ vulnerability to global events? Is there a pattern to the “correction” episodes seen in Indian stocks that are linked to global factors? There is.

Going by previous instances, it appears that economic fundamentals matter little when FIIs take flight. Instead, they simply book profits on markets that have run up the most. Business Line analysed the performance of key global in dices vis-À-vis the Sensex during five corrective phases since 2004 to find out what is the common thread that runs through each of these global meltdowns.

Lesson 1: Fundamentals do not insulate Indian markets from global market sell-offs: Though “Fed rate hikes” and “Yen carry trade” may have entered stock market vocabulary only recently, India’s link with o ther global markets actually goes back a while. In fact, every major correction in the Sensex since 2004 was amid a global stock market sell-off, triggered by events that led foreign investors to re-examine their exposures to risky assets, such as the emerging markets.

In 2004, for instance, the Sensex declined 27 per cent between April 23 and May 17. At the time, the volatility was attributed mainly to political uncertainty, following the change of Government and fears of a slowdown in the reforms process. But these may not have been the sole factors at play. The MSCI Emerging Markets Asia Index, for instance, declined 20 per cent during the same period. The Chinese Government had announced its intention to implement measures that would cool its overheating economy, sparking a sell-off across Asian markets.

In October 2005, again, markets weakened on concerns about further interest rate hikes by the US Federal Reserve. While we are fully familiar with the commodity meltdown and interest rate hikes across markets that triggered the massive correction in May 2006, it was Beijing’s clampdown on speculation that set off another round of stock price declines in February 2007.

So if the prospect of leading mortgage lenders in the US going bust has you genuinely concerned about your own stock portfolio, your fears may not be unjustified.

Lesson 2: Sensex is among the more volatile indices: During such global corrections, most markets fall and recover at about the same time. The extent of the damage each market suffers, however, varies. In the five corrections observed, the Sensex has been among the hardest hit in every one, save the recent decline. Korea, Brazil and Indonesia are some of the other markets that typically bear the brunt of the volatility, as foreign investors have been chasing these markets as well.

However, the corrections so far have always been temporary, with the Sensex rapidly rebounding to its earlier highs and moving past it to newer levels. But this is not to say that India is the only market that has regained investor confidence.

The same holds true for other indices as well. As it turns out, when concerns at the macro level abate, foreign investors re-enter the very markets they exited. While Indonesia, Brazil and Russia underperformed the emerging markets group in the correction of May 2006, they more than recouped their losses in the subsequent recovery.

Lesson 3: Relative valuations do not count during sell-offs: One reason for this rapid recovery could be that the sell-offs seldom seem to be based on a reasoned view of economic fundamentals. We often hear FIIs talk of “expensiv e” Indian markets and the availability of more attractive investment destinations in other emerging markets. But, going by previous correction episodes, it is not always the most expensive market that gets bludgeoned the most.

In May 2004, for instance, the Indian market was not particularly expensive, compared to other emerging markets; the Sensex traded at a price-earnings multiple of about 15 times (trailing earnings) at the time. Yet it suffered the deepest correction.

In May 2006, Indian stocks had been re-rated and were definitely more expensive than other markets, enjoying a multiple of 22. And yes, it was hit the most in the subsequent correction. But, the rally that followed took stock valuations to even more dizzying levels by the end of the year.

On the other hand the Brazilian, Russian, the Philippines and Thailand markets, despite reasonable valuations, received an equal drubbing in the May correction.

China’s markets appear to be dancing to a different tune altogether since 2006.

The Shanghai Composite has defied recent market corrections, even gaining amidst the latest sell-off by about 10 per cent. It continues to enjoy valuations that are completely out of sync with other markets, at about 49 times trailing earnings.

The absence of a connection between valuations and sell-offs seen in the above cases is not hard to explain. As it is often risk perceptions and liquidity that seem to trigger exaggerated market swings, economic fundamentals take a back-seat when investors decide to stay invested or exit a market.

Lesson 4: Higher the rally, sharper the decline: When FIIs turn risk-averse, they seem to first book profits in the markets where they hold the most profitable positions — meaning, the markets that gained the most in the precedin g rally.

In the May 2006 meltdown, it was markets such as India, Indonesia, Brazil and Russia that suffered the sharpest falls having been outperformerstill then (gaining 35-50 per cent since January 2006).

India’s performance till July 24 this year lagged peers such as Brazil, Thailand, Korea and Indonesia. This could also explain why the Sensex has not declined as much as other emerging markets in the ongoing correction. These four were among the worst affected emerging markets in the recent carnage.

Lesson 5: Domestic factors could make things worse: While global market weakness exerts pressure on a country’s stock market, domestic factors also play a role in magnifying the decline recorded.

For instance, October 2005 and February 2007 were weak months for emerging market stocks, in general. But Sensex declines were far more significant than those recorded by other emerging market indices.

In October 2005, India’s widening trade deficit and the depreciating rupee were niggling worries for domestic investors and this led to local investors fearing a FII pullout.

In February 2007, another episode of unusually sharp declines in the Indian indices, interest rate hikes by the RBI and Budget blues exacerbated the losses sustained by the Sensex. In the light of above trends, what conclusions can investors draw about the ongoing stock market meltdown?

For one, this episode seems to mark a break from the past, the Sensex actually registering a lower decline than other emerging market indices. This time around, it is the European markets that are under greater selling pressure.

Going by past trends, this change is probably explained by the fact that the Sensex also registered a muted performance in the preceding rally. In turn, this relatively better performance could signal one of two things.

One, India, along with China, is being viewed as a lower risk exposure to equities, in general, and will thus continue to enjoy premium stock valuations.

Alternatively, the significant valuation premium India now enjoys relative to most other stock markets could lead to a slowdown in liquidity flows. For institutional investors looking to cherry-pick across emerging markets, there could be investment opportunities elsewhere.

Either way, interruptions in liquidity flows appear a clear possibility for the Indian markets in the coming weeks.

The best course of action for investors with a long-term perspective is to look at declines as buying opportunities in liquid stocks focussed on domestic themes.

However, more moderate return expectations may be called for.

The biggest bull of them all Rakesh Jhunjhunwala, says that India is likely to benefit from its strong fundamentals in the long term but only after a tough intermittent transition period.

He feels that high degree of complacency has set in as too much easy money has been made too quickly and world equity markets are bound to get shaken in the near future.

Mr Jhunjhunwala was speaking at the convocation ceremony of IIT Mumbai last week. In what should be called a rare glimpse of bearishness - he bet that the US economy is bound to slow down sometime after a 25 year bull market.

Corporate profits as the engine

But this has not changed his faith in the Indian economy. “India has got all ingredients that markets value,” he quipped. In a presentation made to students, he said that corporate earnings will grow at over 18% (faster than unorganized sector) the sustained earnings expansion driven by growth and productivity.

India has a favourable framework for equity investing with high standards of corporate governance, transparency, effective regulation, electronic trading, dematerialisation and tax paradise for equity investing under the STT regime. “Good balance between domestic consumption and global outsourcing opportunities coupled with rising savings, yet low equity ownership offer a significant potential,” said the legendary investor.

Mr Jhunjhunwala also sang an ode to India’s economic resilience by proving that its being a country with least volatile economic growth. He calculates that the difference between the maximum and minimum GDP growth is least as compared to other Asian countries like Taiwan, South Korea, Singapore, Hong Kong and Malaysia.

Indians everywhere?

Mr Jhunjhunwala says that its people are the country’s biggest assets. One of his slides said that 38% of doctors in America are Indians, 12% of Scientists in America are Indians and similar numbers for Nasa, Microsoft and IBM employees are 36%, 34% and 28% respectively.

He sums up by saying that Indian skills and Indian enterprise have now got a global level playing field and a much superior platform than India Inc has ever had before.

A tough period for equities

He, however, also spoke of scenarios under which the Indian economy could lose way temporarily. Slowdown in US economic growth, tanking of global economy, politicians messing up figure prominently this list.

Turmoil in debt markets, rising oil prices, rising interest rates, China slowdown and global currency realignment are some of the other factors. But the impact on India could be lesser as here interest rates may soften and India’s domestic consumption could see it through. Having said that he warns that the next few months will be tough for stocks.

Conclusion

India has now changed from a deficit to surplus economy with emergence of first generation entrepreneurs. The growth in the airlines industry, mobile phone, increases in tax to GDP ratio and changing attitudes where wealth/profit no longer a dirty word, is a tribute to India’s growing prowess.

ET

In a sudden move, the United States' Federal Reserve yesterday, cut its discount rate by half a percent to 5.75%. That's the rate at which the central bank lends directly to banks. This comes as an acknowledgement by the Fed that market conditions have deteriorated and growth conditions have become constrained.

This move pushed the US markets in the green for the first time in seven sessions. This Fed action also got the European markets a shot in the arm in the fag end of trade.

But what does this move spell for Indian markets? Does it end the agony for markets here?

Ashwini Agarwal of Demeter Advisors said, "I think, making liquidity available for those who need it at this point in time is absolutely critical and that s exactly what the Fed has done. The core issue is, is this dosage of liquidity enough for those who are liquid and solvent to be able to get cash to tide over this problem short-term or will we need more dosage in the subsequent weeks? I do not have an answer to that and I doubt that anybody knows the answer to that, but it s a step in the right direction and it has obviously bolstered confidence in the short-run. "

He expects to see a rally on Monday in India as well, but volatility may remain over the next two-three weeks. Once the problem is isolated and paid for, will only equity markets come back much more stronger or at least, the bottom will be behind us, as they say.

To this, N Jayakumar, MD at Prime Securities, said, "It's certainly an intermediate bottom and a fairly resistant bottom from what I can see. In a loud and clear statement, the Fed has declared the US economy in dire need of crutches. This is the time they made the statement. The statement clearly illustrates that the excesses of the last four-five decades of excessive consumption and the consumer led boom was led by easy credit given to all kinds of people."

But, he adds, "The only question that we need to worry about from an Indian perspective is that if this slows down the US economy, that would be ok, but if they sends it into a recession, that s a different issue altogether. I believe we need to allow the Fed to worry about the size of the problem, there is no point in you and me agonizing about it."

From an Indian market perspective the big much awaited correction has come. Although, on the postive side, the markets including the currency movement have significantly outperformed every year.

Agarwal agrees with Jayakumar, "I agree with Jayakumar, India has outperformed a large part of the world at this point in time. Once over the next couple of weeks, all the adjustments have been made longer-term, the domestic economy will continue to do well. So even if we do see some more outflows and more pain from hereon, I think the opportunity from a medium-term perspective for investors to buy stocks is going to be very good going ahead."

The financial markets have borrowed certain terms from Physics, e.g., leverage or gearing, equilibrium, momentum, etc. Those who understand the concept of leverage or gearing as in Physics or as in real life as an application of Physics can easily understand what can happen in case of financial leverage or financial gearing.

What is Leverage & when is it used?

Levers are used to enhance the effect of limited power available with a person. In other terms, levers are used when one needs more work done but has limited power. In the same manner, leverage is used when one has limited capital, but needs to get higher returns on the same capital. We have the facility to borrow money from those who have surplus; in most cases it is the bank. This borrowed capital added to one’s owned funds allows one to take a bigger position (invest more money) than one could take with only the owned fund. Now we know in levers, if the direction of the force is reversed, the result would be exactly opposite, but of the same magnitude. In financial leverage also, similar thing happens. Let us elaborate this.

Financial leverage is a double-edged sword

An investor has capital of Rs. 5 lacs. He goes to the bank and borrows Rs. 20 lacs. Now he has Rs. 25 lacs at his disposal. Let us say, he invests this amount where he earns 10% on the investment (10% of Rs. 25 lacs is Rs. 2.50 lacs). The profit of Rs. 2.50 lacs is 50% of the investor’s own capital. Although the investment gave a return on 10% on the amount invested, due to leverage, the investor could earn 50% on his capital from the same investment option. And that is the power of leveraging. However, what happens if the money is invested in stock market, which is volatile by nature? Some times, the stock prices move up, but there are certain occasions when the direction changes. Let us assume in the same example that the investment depreciated by 10% instead of appreciating as before. Now the current value of the investment stands at Rs. 22.50 lacs, which is less by Rs. 2.50 lacs than the amount invested. However, out of this, Rs. 20 lacs belongs to the bank (or the lender) and hence, the investor, if he gets out of the market, would get only Rs. 2.50 lacs, which is 50% of his original investment. As seen here, leverage can work both ways.

How do banks (or lenders) assure their safety?

Normally, as a matter of safety of their own money, the banks (or lenders) insist for some security against the loans. In the above example, the money that the investor invested is called margin money and the bank has the first right over all the stocks bought for the Rs. 25 lacs. That is the security of the bank. If this is the norm, in banking parlance, the bank has kept a margin (Rs. 5 lacs) of 20% of the value of purchase (Rs. 25 lacs) – margin of 20% is mentioned only as an example; in reality, the margin may differ from lender to lender. In other terms, the bank has restricted its exposure to the investment to the extent of 80% (Rs. 20 lacs of loan in the total investment value of Rs. 25 lacs). When the prices appreciated, the bank was fine since the value of the investment was Rs. 27.50 lacs whereas the bank’s exposure in the investment was Rs. 20 lacs (72.73% - Rs. 20 lacs divided by Rs. 27.50 lacs), which is lower than 80% of the value.

However, when the prices declined, the portfolio value stands at Rs. 22.50 lacs, out of which the bank’s exposure is 88.89% (Rs. 20 lacs divided by Rs. 22.50 lacs), much in excess of 80%. The bank now calls some money from the investor (known as margin calls) to restore its exposure back to 80%. If the investor is unable to meet the margin call, the bank is left with the only option of selling some of the shares in the market. How many shares does the bank have to sell to restore the exposure level to 80%? The answer is surprising (in fact, this also is a result of leverage). The bank has to sell shares worth around Rs. 10 lacs so that the value of the investments is now Rs. 12.50 lacs and the bank’s exposure is Rs. 10 lacs (80% of the investment value – Rs. 10 lacs divided by Rs. 12.50 lacs).

As discussed earlier, the bank calls for margin when the prices decline, and if the investor is unable to pay the margins, the bank is required to sell some shares in the market. This causes the prices to fall further and the bank requires more margin money. Add to this the fact that most of the loans also happen to be for buying the shares where the investor interest is the largest. That means when the banks need to sell shares to safeguard their own positions, most would be selling the same stocks. Eventually, the rally stops and the markets takes a nasty “U” turn leaving many investors shocked with the steepness of the decline.

If one understands the behavior of the markets as per the above discussion, the decline or its steepness is never a surprise. This was set up when the prices were moving up. And every uptick was only increasing the risk level in the market.

Are we suggesting that loan is a bad thing?

Not really. A loan is a good thing as it allows those with limited resources to acquire assets beyond reach. However, as is said about many other things, anything could be good if it is within limits. Loan for buying a house property is generally a good thing as long as one has enough earnings from other sources to pay the installments and that the ability to continue the income in future is good. Taking loan for business is also a good thing as long as the profit margins from the business are higher than the interest cost.

It is important to understand the nature of the loans and the asset / property one acquires. If the asset price is very highly volatile and not generating any income, taking loan for acquisition of such property is a good idea only if, (i) one has other sources of income and other assets to a bankruptcy and (ii) in the short term one has the ability to pay margins to the lenders.

Meeting the above conditions means that the amount of leverage gets capped to a certain extent.

There have been many examples in the history of large institutions and experts completely getting wiped out due to excessive usage of leverage. Those interested in knowing more about the devastation leverage can cause may read a classic called “When Genius Failed” written by Roger Lowenstein.

The yen’s appreciation to the dollar has taken most analysts and market participants by surprise. Experts were expecting the yen to touch 116 levels, but it has already appreciated above 113. This is an 8-9% appreciation in just two-three weeks. There is a global sell-off in markets with investors rushing to exit their carry trade positions and the Nikkei has seen one of its worst intra-day falls ever since 9/11. Indian markets have been falling like ninepins and are breaching one resistance level after another.

This unwinding was prompted by investors who are worried about the happenings in the US sub-prime mortgage market, extend of the damage and the impact that it could have on global liquidity. A lot of the carry trade unwinding has happened already but analysts feel that more unwinding could still be remaining.

Anil Manghnani of Modern Shares & Stock Brokers feels that after sub-prime, yen carry trade could be the next villain. “First it was sub-prime and now it seems to be yen carry trade. The way Asia has traded in the last three days, suggests there is still some unwinding left in the yen carry trade. The way a lot of delivery base selling took place in some of the larger A group blue-chip stocks would suggest that there is still some pain left in the system,” he added.

So, what is this yen carry trade all about?

In the mid- and late-1990s, Japanese interest rates were almost near zero. Their economy was fighting a deflation and the central bank there progressively reduced interest rates in a bid to spur households and businesses to spend, invest, and revive the economy, which was in deep recession. Meanwhile, when Japan was in a slump the rest of the world tried to have a good time at its expense and thus was born the yen carry trade.

Investors used to borrow in the yen and convert the same into dollars to invest and take advantage of low interest rates on the Japanese currency.

The trick in making money out of the yen carry trade has always been to catch the yen in phases of depreciation, which has been few and far between.

This was a sound strategy, which was profitable in a depreciating yen scenario. Now, with the yen appreciating, tables are beginning to turn.

To aggravate matters the Bank of Japan, or BoJ, may also raise interest rates in its August 23 meeting. This could have huge fallout in India as well as a number of domestic companies had tied up loans when the yen was depreciating, which was to be settled in dollars. However, most companies have not hedged against the sharp upmove in the Japanese unit. A number of corporates that had swapped their rupee and dollar loans into yen through synthetic currency futures may now be in a soup.

It was one of the most volatile day for the markets in recent past wherein Sensex opened weak with over 150 points cut following second steepest ever drop yesterday and proceed to trade extremely weak on account of subprime issue coupled with Yen carried trade. Sensex fell nearly 600 points by the mid session but in post lunch trade the bulls put up brave fight leading to spectacular recovery over 500 points. But finally, bulls could not maintain their momentum and again markets slipped in late trade on the back of sharp sell off witnessed in metal and IT stocks.

Sensex ended down 216.69 points or 1.51% at 14141.52, and the Nifty was down 70.55 points or 1.69% at 4108.05. About 1010 shares have advanced, 1940 shares declined, and 52 shares are unchanged.

BSE Midcap was down 92.97 points or 1.46% at 6,259.47 and BSe Smallcap was down 102.46 points or 1.31% at 7,694.80.

Ketan Karani, VP Research of Kotak Securities says, “I think the recovery was overdue. We were getting hammered by triple digit falls everyday and nervousness was there all round. So at some level, the buying was supposed to come in. The market has bounced back from 200 day moving average and a reasonable amount of short covering along with long investment buying was seen. We believe for the day, this should at least continue.”

He is advising his investors to purchase, but be cautious. “We have been advocating buying as of today and we have been buyers in lot of the frontline stocks. We have been buyers at lower levels and as of date, I do not know what is the strategy being followed. But we have been buyers since morning, since the fall around 14,000 and below 14,000 was activated. We have been advising clients to purchase in a staggered and selective manner and be very choosy with the stocks, which you would want to invest.”

Looking forward, Karani feels that we are in a structural economic bull run. “We believe the economy is doing the right things and yes, global things have impacted us significantly, not as significant as they have impacted the global markets, we have been lesser impacted. But there was too much of complacency among traders and among investors. So the complacency has gone away, lot of loses would have been taken, profits would have been booked. From here we believe as and how the economy moves and how the news flow comes from the economic side, markets will tend to move up but liquidity will be the deciding factor. What kind of liquidity flows back to India and what kind of domestic liquidity is pumped back into the equity markets. So these two things will decide the course of direction going forward. But yes, bottom formation would be a process. Today’s bottom would be a good healthy bottom for reasonable long period of time. Let us see how it test going forward,” he adds.

Nilesh Shah, CIO of ICICI Prudential shares a similar sentiment. “The end game will be certainly bullish for Indian investors I have no doubt in my mind about it. The moral of the story is that if you are domestic investor base is not strong enough to take the global volatility then your markets will slide down like this. Even if fundamentally it doesn’t warrant the same treatment,” he says.

The traditional view is that stock markets are barometers of the economy. It is expected that the markets and their indicators, in the form of indices, reflect the potential of the corporates listed on them and, in the process, the direction and health of the economy. If a country’s economy is performing well and expected to grow at a healthy rate, the market is usually expected to reflect that.

But globalisation has changed all that. The day trader in Guntur or Kamrup has to worry about sub-prime foreclosures and yen carry trades. He has to read the lips of the Chief of European Central Bank and understand the nuances in the speeches by the Chairman of the US Fed.

Unfortunately, though, this globalisation seems to be a one-way street. We are integrated with the global market and influenced by developments in Alaska or Adelaide but our market has little influence on global markets. We do not see news reports that the Dow Jones has been affected by a Mumbai melt-down or that the FTSE was impacted by political drama in New Delhi.

Hence, our market’s tango with others is extremely dangerous, particularly for the financial illiterates who are large participants in day-trading activities.

The market is still skewed, the top 10 securities constituting 23 per cent of the turnover and 25 securities constituting 42 per cent in June (NSE News, June 2007).

The share of top 10 trading members was 25 per cent and that of top 25 members was 44 per cent (NSE News).

The role of FIIs is significant from the point of view of gross turnover, as seen in Table 1. It shows that FIIs constitute an important segment of trading in this skewed market and their ‘sells’ in August were higher than their ‘buys’.

It is estimated that more than 30 per cent of the gross activity is due to FIIs and around 15 per cent due to MFs, etc.

It seems that MFs are net buyers in August, thereby cushioning this system, which is quite volatile due to FII sales. The small, or individual, investor is caught in the midst of all this.

A significant portion of day-traders are individual investors and they may not have full information on global issues affecting the market through FIIs.

Also, while an individual in the US or Europe can diversify his portfolio in New York and Mumbai, one in India can only buy in India. Of course, he can invest up to Rs 100,000 in the global market through specified banking channels, but this scheme has not been popular given the interest rate differential between India and other markets.

Given this asymmetry, global sneezing may lead to an Indian cold but even Indian typhoid has little effect on global participants. It is thus clear that the integration that has happened in the stock market is just one-sided.

Coupled with this is the enthusiasm of Indian corporates for global money. In the last two years, the appetite of large corporates for external commercial borrowings has been huge. Table 2 indicates the role of FII /FDI and ECBs during last two years.

We find from the RBI data that the role of external commercial borrowings by corporates and FDI/FII were significant during 2005-06 and 2006-07. ECBs showed an additional inflow of more than $13 billion and, interestingly, the top 10 companies, such as Reliance Petroleum ($2 billion) Reliance Communications ($1 billion) Tata Steel ($0.8 billion) Reliance Industries ($0.8 billion), and Reliance Energy ($0.8 billion) constitute more than 30 per cent of the ECB approvals/registrations in the later period.

This shows that corporates are increasingly looking at external sources due to lower cost and, to that extent, developments in the global markets affect their ratings. Major global borrowers also have considerable impact on our stock indices.

An interesting situation has arisen in the development of our capital markets wherein they are significantly influenced by global developments because of the active participation by FIIs, and, at the same time, big corporates are showing an appetite for the global borrowings and not for domestic debt, because of the interest rate arbitrage.

In such a situation we find that the stock market is getting increasingly disconnected from the domestic economy, which is expected to grow at more than 9 per cent in the years to come.

Already, there exists a wide divide between Government and Society and now there is a new disconnect between the economy and the stock market.

Individual day-traders need to exercise caution and not ignore a mild cold in London. However, the Finance Minster need not lose sleep because of the rise or fall of the the index since it is due to a chill in London or Tokyo and not in our economy.

The subprime shadow may not creep up on domestic banks for now, but it is likely to impact their borrowing plans with credit spreads increasing. Banks such as ICICI Bank and the State Bank of India have ruled out any impact on their portfolios as a fallout of the subprime crisis.

Rattled by subprime fears, the Reserve Bank of India (RBI) had sought information on the possible exposure of domestic banks to the subprime crisis by way of their investments in credit default swaps and other derivative instruments. Investments by domestic banks in such derivatives is estimated in the region of -4 billion.

Standard Chartered Bank head (global markets, south Asia) Sundeep Bhandari said, “The impact of the US subprime mortgage crisis on Indian banks is negligible. The short-term impact will see widening of credit spreads across Asia, including India. It is unlikely that Indian institutions would have a meaningful exposure to credit default swaps and any such investments would be in held-to-maturity (HTM), hence volatility will be low.”

Analysts say the credit spreads have increased by over 500 basis points due to investors’ aversion to risky assets. Consequently, investment in such assets will lead to valuation losses as they are marked-to-market in the books of the banks.Global equity markets have been affected due to large-scale defaults in subprime housing loans in the US. There are fears the contagion may spread and lead to a general deterioration in credit quality across markets.

Though international rating agency Standard & Poor’s (S&P) has said the current problems with the subprime market will not precipitate a crisis in the financial markets, it has also said the defaults have shrunk the market for collateralised debt obligations (CDO), which could mean less flexibility for highly-leveraged companies.

However, debt raising by India corporates is modest, and not of the leveraged nature seen in the UK or the US where huge multiples or leverage of debt is being raised, Mr Bhandari said.

Thanks to limited leveraged buyout activity, domestic banks are largely insulated, feel bankers. ICICI Bank has Rs 6,000 crore of collateralised debt obligations (CDO) on a balance-sheet of over Rs 3,00,000 crore. ICICI Bank deputy managing director Chanda Kochhar has said the bank’s exposure is almost entirely to India-linked paper.

Collateralised debt obligations are asset-backed securities that enable banks to transfer credit risks among a number of investors. The assets, called collateral, usually comprise loans or debt instruments.

But is this a good time for banks to raise capital? “Our merchant bankers have reassured us that normalcy is likely to return by October. It will not be the same again, but over two months, the situation is likely to be uncertain. We have been advised against going in for a medium-term note issuance at this stage. It is not clear by how much the future cost of borrowing will go up. We are not able to put our finger on how the credit spreads will move,” a State Bank of India source said.

However, analysts feel there is no reason to be wary and risk-averse at this stage. “FII inflows have not been affected. Similarly, Indian banks going abroad are unlikely to be affected in the long run. The India story is still strong, with robust investor appetite,” a merchant banker said.

What is happening in the mortgage market?

The riskiest segment of the US mortgage market, which serves borrowers with poor credit histories at high interest rates, has seen rising default rates in recent months.

The Mortgage Bankers Association said lenders began foreclosure against more than one of every 200 US mortgage borrowers in the fourth quarter, a record.

What types of loans are considered 'subprime'?

There are "no doc" loans. That's when you get a loan without giving the lender any documentation about your income. There are also "low doc" loans, or when you get a loan with just a little paperwork about your employment and income.

The number of non-traditional loans extended with low or no documentation jumped from 53.9 percent in 2003 to 65.7 percent in 2005, according to First American Loan Performance, which tallies home mortgage data.

How did this crisis come about?

While subprime mortgages have spread credit more widely and helped more people buy their own homes, critics contend a hot real estate market encouraged lenders to get more aggressive and offer increasingly complicated terms that borrowers did not always fully understand. These risks are being exposed as the housing market cools.

What's happening to the lenders ?

Waning demand from investors for home loans has toppled more than 70 mortgage companies and half a dozen hedge funds in the US since the start of last year. Concern over rising defaults has prompted bankers to reduce credit lines for home lenders.

Why is the meltdown among subprime lenders having an impact on the whole US stock market?

There is concern that the crisis could spread to more mainstream lenders and worsen the US housing slowdown. Delinquencies often foreshadow future loan failures and those bad credits could damage other mortgage-backed investments held by a wide range of investors.

Some economists worry that as house prices fall and lenders tighten credit terms, consumers will curb spending and drag down the US economy.

What would be the damages?

The US subprime mortgage crisis will cost credit investors about $150 billion in losses worldwide, according to Calyon, the investment banking unit of Credit Agricole SA, France's third-largest bank by market value.

Foreclosures may reach 20 percent of the $1.3 trillion of subprime mortgages outstanding, according to a research note. Assuming investors can recoup half their investments, losses would be $130 billion, it said.

A further $20 billion could also be lost from the $1 trillion of outstanding Alt-A mortgages offered to borrowers with better credit who fell just short of typical standards. Various other estimates for total subprime losses range from $50 billion to $200 billion, according to the report. Federal Reserve Chairman Ben S. Bernanke last month cited potential estimated losses of between $50 billion and $100 billion.

What's the outlook?

Some analysts believe the crisis in the subprime mortgage market could boost the chances of the Federal Reserve cutting its target for benchmark interest rates.

One of the factors driving the poor performance of subprime mortgages has been a series of interest rate increases by the Fed. From 2004 to last summer, benchmark rates rose 4.25 percentage points to 5.25 percent. That has led to a steep rise in payments on adjustable rate mortgages.

"The Fed is aware of the situation, and how raising rates might worsen the situation. " said John Kriz, managing director of real estate finance at Moody's Investors Service, a leading credit ratings agency. "Our view is that it is less likely that rates will rise and more likely they will fall."

The Fed may have done enough after adding $62 billion to the banking system on August 9 and 10 and pledging further funds as necessary, says Dominic Konstam, head of interest-rate strategy at Credit Suisse in New York. Stocks rallied worldwide on Wednesday, while the ECB said today it's optimistic that ``market conditions are normalising.''

Investors have cut their heavy equity positions in August and boosted cash and bonds as fears of a liquidity squeeze and a sell-off in stocks made them more averse to risk, a poll showed on Wednesday, 15 August.

Investment bank Merrill Lynch’s August survey of global fund managers, taken between 2-9 August, also showed fund managers saw the stock market sell-off as a buying opportunity and remained confident about robust economic fundamentals.

The poll, which surveyed 181 fund managers managing a total of $599 billion, is one of the most timely snapshots of fund managers’ activity during a sharp fall in risky assets, triggered by concerns about liquidity and deteriorating credit markets stemming from troubled US subprime mortgages.

“People have become more risk averse. What’s surprising is that there doesn’t appear to be a major change in their views on stocks. People still see value in equities relative to bonds and they see it almost as a buying opportunity,” said David Bowers, consultant to Merrill’s poll. “People think this is a credit or financial event but they are not positioned for a spillover to the macro backdrop.”

Forty-nine per cent of respondents were overweight equities in August, down from 69% last month. Fund managers became less bearish on bonds, with 65% underweight this month, down from 72% in July.

The cash balance rose to 4.4% from 3.4% in July, its lowest since the survey began in January 1998.

Fund managers trimmed expectations for corporate profits and core inflation, but more than 90% of them said the global economy was unlikely to experience recession over the next twelve months.

“The survey isn’t as bearish as it was expected to be. It’s not business as usual, but they haven’t thrown in their towels,” Bowers said.

Investors also kept their faith in emerging markets. More than 30% of the managers said global emerging markets offered the most favourable outlook for corporate profits, overtaking the euro zone which has been the top favourite throughout 2007.
The managers saw credit default risk and counterparty risk as top potential threats to financial market stability.

As for currencies, fund managers saw the yen as cheap, while the euro and sterling were seen as expensive. Respondents became slightly less bullish on commodities, with 17% overweight, down from 18% last month.

India’s stock market remains the most expensive in the Asia-Pacific region outside of Japan, despite a sharp downturn in the past few weeks, international brokerage firm Citigroup said on Friday.

“India continues to be the least attractive market from our perspective, by a significant margin. Although composite momentum has turned positive, India still looks very expensive,” Citigroup said in its latest report on the Asia Pacific markets.

Singapore is the top-ranked market on an aggregate relative basis, and although valuations are stretched, long-term momentum is strong. Citigroup said it believed the market was attractive compared to its Asia-Pacific peers.

Malaysia and China are in the ‘Glamour’ category, representing expensive but with a strong momentum.

“India remains at the bottom of the pile, with a marginal improvement in momentum due to flat earnings revisions, but relatively poor valuation scores keep it expensive,” Citigroup analysts said in the report.

The country’s stock market benchmark, the BSE Sensex has fallen more than 1,000 points in the past few trading sessions following concerns related to the US subprime crisis.

According an earlier report by Citigroup, India was the overall most expensive market in the region for 2007 after considering various metrics like price-to-earnings (PE) ratio, book value, cash flow, return on equity and enterprise value.

Citigroup had termed India more expensive than China, Hong Kong, Philippines and Australia, while it named Thailand, Korea, Taiwan, Indonesia and Malaysia as the cheapest.

Analysts at Citigroup had said in their Asia Macro Investigator report that India has “lofty valuations both relative to its own historical levels and other markets”.

The Sensex suffered a plunge of 541 points in the last week of July and another blow shaved off 615 points on August 1. The index fell 232 points on Friday to settle at 14,868 points.

This week, the domestic market fell on cues from Europe where markets turned weak after France’s biggest bank, BNP Paribas, suspended withdrawals from three mutual funds on concerns related to the US subprime crisis.

In India, total investors’ wealth, measured in terms of the cumulative market capitalisation of all listed entities, has grown to about Rs 44,48,662 crore from about Rs 27,12,000 crore on July 21, 2006.

A construction boom and fast growing retail market are fuelling development of over 500 malls in India by 2009, but private equity and real estate funds are still struggling to find the right projects.

Funds are seeking projects with the right retail mix, size and strategy but are meeting instead with developers with unrealistic growth plans, dubious title deeds and unknown retailers with unhealthy balance sheets.

“It is a scary situation at the moment. One has to be very careful if it comes to shopping malls,” says Alex Hayim, director at privately-run REIT Property Management, which is yet to invest in a mall despite being in India for over two years.

While India’s organised retail -- just 3% of the total industry now -- is expected to grow 40% a year to $22 billion by 2010, developers have set ambitious targets to add retail space in malls, dwarfing plans in other Asian cities.

While 103 malls are planned in Delhi and surrounding areas by 2009, Shanghai and Beijing will together see 56 malls coming up, estimates by property consultancy Cushman & Wakefield indicate.

“Picking up the right opportunity becomes a big question mark,” said Rajneesh Mahajan, national head-retail, Cushman & Wakefield. “It’s about the developer’s ability to construct and then run those operations efficiently.”

Wanted: Mall makeover

Real estate funds, hoping for a larger play in India’s market after restrictions were placed on bank funding on projects, see value in townships, commercial and residential projects, but are frustrated by the many start-up problems that plague the sector.

Malls come with new challenges, inheriting typical real estate problems -- lack of transparency, restrictive regulations and valuation differentials -- and retail’s teething problems.

Curbs on foreign retailers’ entry has also hurt projects.

“There are not enough international retailers that these funds recognize,” said Anuj Puri, country head, Jones Lang Lasalle Meghraj. “Among Indian retailers, the bigger ones still have healthy balance sheets, but smaller ones don’t.”

Lack of parking, inferior surroundings and poor construction quality characterise Indian malls. Over 90 percent of current and planned shopping malls fall below international standards on specification and design, said a Jones Lang Lasalle report.

Funds are also questioning the way these malls are managed.

“Today, there aren’t enough highly professional mall management companies as overseas. As a result, they wonder who will do promotions and get in additional footfalls,” said Puri, adding proven track records help investment decisions.

Funds are also not keen on developers who sell out space for a quick return instead of adopting the leasing-out model used internationally.

Value still secure

There is real value in mall projects, says Ramesh Jogani, managing director at IndiaReit Fund Advisors, which has invested in a mall, but only as part of a township project.

“A mall could double its value in 4-5 years. Apart from lease rentals, you can sell out to a strategic investor at a later date, when there is a surge in value,” he said.

“If the tenant profile is strong, location is good, footfall is good, everyone makes money,” says REIT Property’s Hayim. “It’s an asset which can go up in value, there’s no doubt about that.”

The markets had been strongly moving towards 16,000 mark and bulls were gaining momentum. However due to subprime lending worries global markets saw a meltdown. The impact followed and the Sensex failed to cross that 16000 mark. It lost nearly 900 points from its all-time high of 15868.85.

On Black Friday, July 27, it plunged by 640.47 points and on Wednesday it slipped nearly 617 points to touch an intraday low of 14910.52. This impact was seen across the sectors as well as on new listings.

An investor who would have held these stocks in anticipation of a bullish market, may have seen huge losses, since share prices fell 4-41% from their respective all-time highs.

DLF, a real estate major, which had come out with a public issue of 175 million shares and raised more than Rs 9100 crore, lost more than 18% and Vishal Retail, which saw a subscription of more than 80 times, slipped 22%, from their respective all-time highs.

Major losers are Roman Tarmat, Suryachakra Power and Celestial Labs, which fell 41%, 32% and 29%, respectively.

S Naganath, of DSPML Fund Managers says that the markets are at 18x FY08E earnings and is not too expensive. The subprime issues & higher currency volatility is a concern. Also the oil market is building a risk premium, which is a matter of concern. They are currently sensing caution in the market given international risk factors.

Speaking on the trends in the market, Naganath says that they expect to see the trend continuing in 2-Wheeler segment. On interest rates, Naganath opined that it is too early to say that interest rates may have peaked. He adds that the real estate has been underperforming but it may pick up. On the global scenario, he says that the global risks crucially poised, could derail sentiment. Also Carry Trade is seen impacted given any sharp change in $-Yen rate.

There is also no potential of an US economy slowdown, given the high commodity prices. On technology numbers, Naganath says that they are having a degree of caution in tech stocks, though the numbers so far have been in line.

After spectacular comeback rally yesterday, the markets continued its roaring momentum and opened on rocking note today on the back strong cues from the global markets. Asian markets are trading extremely buoyant today following tear away performance of US markets.

There was euphoria seen all around and no stocks opened in red in Sensex and Nifty. Metal, IT and realty stocks were roaring in the opening trade and the market breadth was extremely positive.

At 9:56 am, Sensex was up 180 points at 15272 and Nifty was up 51 points 4497. Major gainers in the opening trade were Reliance, Infosys, Bajaj Auto, GMR Infra, Rel Comm, Sterlite, DLF, Hindalco, ICICI Bank, Satyam, Tata Steel and Tata Motors.

Asian Markets: Records fell across Asia on today, buoyed by a strong overnight rally on Wall Street, with indices in South Korea, Singapore and Taiwan hitting intraday highs. Hong Kong's Hang Seng surged 1.86% or 430.90 points at 23,232.71, Japan's Nikkei gained 1.40% or 251.01 points at 18,235.15, Taiwan's Taiwan Weighted rose 1.16% or 108.64 points at 9,463.05, Singapore's Straits Times surged 1.29% or 46.73 points at 3,671.29 and South Korea's Seoul Composite advanced 1.90% or 36.28 points at 1,946.03.

US markets:

The Dow shot up 283.86 points, or 2.09%, to 13,861.73; its previous record close, which also came June 4, was 13,676.32. Thursday's jump was the biggest one-day percentage gain for the blue chip index since October 2003 and the biggest single-session point gain since October 2002. The Dow also reached a new trading high of 13,869.94 and saw its 50th record close since the start of October.

The Nasdaq composite index rose 49.94 points, or 1.88%, to 2,701.73; the rise Thursday marked the biggest one-day percentage increase since March. The last time the Nasdaq closed at such levels was in February 2001. Still, the index, bloated by the late 1990s tech boom, is nowhere near its closing record of 5,048.62, set in March 2000.

Market cues:

* FIIs net buy USD 89.2 mn in equity on July 11
* MFs net sell Rs 332.20 crore (Rs 3.32 billion) on July 11
* NSE F&O Open Interest up by Rs 2,208 crore (Rs 22.08 billion) at Rs 79,574 crore (Rs 795.74 billion)

F&O cues:

* Futures Open Interest up by Rs 1,632 crore (Rs 16.32 billion); Options Open Interest up
by Rs 576 crore (Rs 5.76 billion)
* Nifty Futures add 8.4 lakh shares Open Interest
* Nifty Open Interest Put-Call ratio down to 1.54 from 1.55
* Nifty Calls add 3.8 lakh shares in Open Interest
* Nifty Puts add 4.2 lakh shares in Open Interest
* Nifty 4500 Call adds 4.1 lakh shares in Open Interest
* Nifty 4500 Put adds 3.2 lakh shares in Open Interest
* Nifty 4400 Put adds 2.1 lakh shares in Open Interest
* Nifty 4450 Put adds 2 lakh shares in Open Interest
* Nifty 4100 Put sheds 3.1 lakh shares in Open Interest

TRENDS: Rising labour costs and declining margins prompt the larger firms to open overseas centres.

Faced with attrition rates as high as 40-50 per cent and rising labour costs that are squeezing profit margins, some of the larger Indian IT companies are acquiring businesses or setting up development centres in such countries as Mexico, Philippines and Thailand, where English-speaking skilled manpower is available at half the wage rate prevailing in India.

“It is a case of companies going where talent exists,” says Pravin Chand Tatavarti, managing director, Allegis India, the Indian subsidiary of the $5 billion Allegis Group, a leading provider of technology, recruitment and human capital management solutions to business.

“I would not refer to this trend as outsourcing by Indian companies but would rather call it a multi-centre strategy to attract talent.” He says that more than cost reasons, this provides Indian companies with a competitive advantage-high-end skills blended with low-cost resources.

The trend is evident in both IT and BPO firms such as call centres; banking, financial services and insurance (BFSI); and payroll and benefits administration.

Jobs that are being outsourced include R&D specialists, business analysts, programmers, customer service representatives and process specialists in finance and HR.

Offshoring is also happening due to a lack of skills in areas such as high-end product design, architecture or industry- or company-specific expertise that India lacks.

Allegis India, for example, having acquired EASi Technologies, a tier one supplier of high-end engineering design and analysis services to automobile OEMs across the globe, outsources some of its automotive designing requirements.

Bangladesh, Sri Lanka and China are some of the locations where companies have set up back-offices. Eastern and Northern European countries such as Hungary, Czech Republic, Slovakia, Northern Ireland, Latin America, and Asian countries such as the Philippines and Thailand, among others, are the biggest beneficiaries of this development.

Says Veena Gundavelli, CEO of SITI Corp, a Hyderabad-based provider of offshore recruitment process outsourcing services: “A major factor that has contributed to this trend of increasing the presence in certain parts of the world is to capture more business- for example, having a European outsourcing centre can increase the probabilities of attracting more business from Europe.”

Certain parts of Europe, she says, combine cost-effective operations along with the availability of highly-skilled labour in engineering, technical research and business consulting.

“Jobs that are being outsourced are mainly those of R&D specialists, customer representatives and payroll administrators,” says Chaitanya Nadkarny, director, operations and HR, at ThoughtWorks Technologies, a global IT consultancy that focusses on end-to-end global software development and delivery.

Opening on a firm footing, the markets flattered to deceive the bulls as the closing was lower than the opening. That the indices surrendered their early gains was not as critical a matter as was the fact that the lower top and bottom formation was seen on the benchmarks.

The lower traded volumes provided mild comfort as panic sales were absent. The ratio of number of trades versus the total traded volumes indicates a domination by institutional players and the HNI’s who traded selectively.

The market breadth was expectedly negative as the BSE & NSE combined advance decline ratio stood at 1521 : 2086. The capitalisation of the breadth stood at Rs 4625 crore: 5659 crore.

The indices have closed at the lower end of the intraday range and the 4209 resistance that I had advocated over the weekend which must be overcome remained inviolate as the Nifty retraced from the 4208 levels.

The coming session(s) will witness a resistance at this critical short term congestion level as the overhead supply is likely to be significant at this juncture.

The bulls will need to defend the 4120 - 4100 band very vigorously if they are to succeed in staving off the bears in the near term. The markets are in a choppy and tentative mode with a lack of clear direction.

Normally such periods of linear consolidation are followed by bigger moves. Keep watching the average traded price of the near-month Nifty futures, traded contracts versus total turnover ratios and the open interest for signs of short term trend determination.

The outlook for Tuesday is that of caution as the bulls are on the back foot and continue to lack the fire power to overcome the bears convincingly. Remain off aggressive purchases for now.