Pretty late to write on the recent blood bath, but alas, I was too distraught to do anything. (Though of late this is the norm for me). Halal Street (mindfully misspelled) was witness to nothing less than carnage. To put things in more perspective, as is with every stock market event, let me point out where the current correction stands in historical sense.
Black Monday Many of these crashes take place on Mondays leading to the famous or rather infamous ‘Black Mondays’. The only way this can be explained is a trader’s rather unexciting weekend. Either he gets too bored that he starts worrying about trivial things or rather is made to worry after shopping with his wife. So in this panicky mood, the only thing he does the Monday is SELL, SELL and SELL.
In spite of blatant claims by the media of Sensex witnessing its biggest fall, any one familiar to percentages (assuming you do, as you have got this far), the recent fall is only the third biggest. The major reasons for this fall include (Utterly debatable, anyone and everyone can disagree with me),
Global cues
Should I say more? The subprime crisis has snowballed into a major crisis drying up funds in the US and over Europe which has directly affected their markets. Due to the crisis, the FIIs (Foreign Institutional Investors) have had to unwind their position in India. Now allow a little detour as to understand how the FIIs have made huge profits in India.
India touted as the best emerging market is growing at about 10% YoY basis. Add to this, the global interest in India had made most FIIs flock to India. This means there was a large supply of dollars and Rupee was being bought to invest in India. That explains theappreciating rupee. Now let us assume for simplicity that the FIIs have earned a return of 10% on their investments in rupee terms. Now with a weak dollar, it makes much more sense for them to book their profits and get out of here as in Dollar terms, the returns will be even higher than 10%.
OK. I will make it simpler. Say I brought in 1000$ at 45Rs/$ a year ago. So that means I invested 45000 Rs. Now this year it has grown to 49500Rs (10% growth). But in dollars I would have earned 1237.5$ (assuming 40Rs/$) which means about 23% return on investment. Now that is a double whammy. So makes more sense for the FIIs to book their profits and get out of here.
Margins
This could get a little complicated. When dealing with derivatives, (Contracts that derive their value from basic stocks), traders are required to submit margin amounts. The margin amounts usually vary between 10% to 20%. This provides the much hyped ‘leverage’. To better understand it, consider this.
There is a stock quoting at 100 Rs. Now in a future contract, you need to pay only 10 Rs for it. Now if the stock trades and ends the day at 110Rs, your contract is worth 20Rs which means 100% return on investment, whereas the stock has only appreciated 10%. Same is the downside, a 10% fall means your capital is wiped out. This is leverage. You buy more with
less money. (I have conveniently ignored factors that determine the future contract price which may not be the same as the stock price at the end of the day, in my quest to keep it simple.)
The recent bull-run had reached such enormous proportions that, even that 10 to 20% to be given as margin was quite a considerable amount. And brokerage houses tended to accept shares from its clients in place of money for the margins needed to be provided.
But as is with future contracts, at the end of day, the contract is marked to market, meaning you have to provide money in case you have made a considerable loss. But the people who had provided their shares as margin either went bust or could not get cash quick enough to replenish their accounts (inefficient banking systems). So as a result of the loss they had suffered that day, the stocks they had provided were sold by their brokers in order to recover the cash needed to clear their positions. This kind of relentless selling drove the markets down to abyss.
Reliance power IPO
Many might not agree, but still I would have it right up there as one of the reasons. The issue at a size of 11, 700 crore at upper cut-off price got over subscribed 69 times. Hence it sucked a lot of liquidity out of the system. Blatantly using one of my Professor’s line, ”Ambanis are son-in-laws of the government, they can get away with anything”, will justify the kind of euphoria associated with the issue.
Now I will try to justify how bad an issue, Reliance Power is. A company that does not have anything on its balance sheet, no running plant and with just projected earnings, Reliance Power has been more than successful in raising capital. If it lists at 900Rs per share, it gives it a market cap of Rs 2 lakh crores, which was the market cap of Reliance Industries (Established company) a few months ago. In 4 years they plan to have 28000MW running capacity. Whereas a stock like NTPC which already has 28000MW installed capacity and has expansion plans has a market cap of less than Rs 2 lakh crores (with equal debt levels as Reliance Power). Also NTPC has the highest capacity utilization in the sector at about 90%.
Investing is not entirely a mind determined action, though ideally by capitalistic definitions it should be. Men think more with their heart than mind when it comes to women, war and money (Yours truly is no different. Have applied for 900 shares). When as much as 8 lakh crores is blocked for the IPO, it needs more than a miracle to expect people to hold on, booking their losses in the future position in the current fall. So the issue is one of the main triggers for the fall, more so because of the bad omen it portended in its last day.
Lighter moments of the Fall -The trade halting goof-up
January 21 was one day when the usual chirpiness and smiles were totally missing on the sullen faces of the lady anchors on business news channels. But still BSE provided the necessary entertainment. After 2:30 PM, they halted trading thinking they have hit the lower circuit filter (10%), whereas when they were supposed to do it at 15%. Later on being questioned by SEBI, as to why they stopped trades, BSE has admitted to a
technical snag, which conveniently coincided with the 10% drop.
Long term effects
The markets may come back to their original levels in a week, a month, a year or at the most a decade (During the Harshad Mehta scam, Sensex fell from 4000 and took 7 years to reach it again).
But the traders who had future contracts and other derivative instruments have suffered irreversible losses, as they are now out of money to participate in the recovery. Many of them will never return to the stock markets and will look for making a living somewhere else.
And going forward the RBI will at least in steps increase restrictions on FIIs curbing this kind of pullout from the markets. This will be beneficial to the markets in the long run. What is needed is more domestic participation than FIIs prowling for profits.
Also for bargain hunters, they cannot have a better chance to buy stocks that were available at discounts as all sectors got rerated. If you are planning to build yourself a portfolio, then there cannot be a better time to pick up some quality stocks (sriniselvam@gmail.com for recommends).
