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Correction? Flight of FIIs? Poor regulatory control? Stronger US dollar? Tumbling emerging markets? Whatever be the reason for the huge drop in the Sensex, the confidence of the average retail investor in the bourses has taken a strong beating, reports Maneesh Chhibber
Investors who had shifted from equity shares to commodities in order to neutralise the risk factor have also lost heavily as global commodity prices too have plunged sharply. The plummeting share market was followed by a wave of panic selling, most of it on loss. The brokers, who had hoped to book profits in the short-term, began exiting the markets in a hurry. But, while more seasoned brokers and long-term players might just manage to recoup their losses, it is the average retail investor, one of the over two lakh across India, who has been hit the hardest. With market analysts saying that the surging bull in the one-year period preceding the stock market tumble attracted over 20,000 middle-class persons to the stock market, the depletion in the value of stocks could have shaken their confidence. "When I retired in 2001, I received about Rs 8 lakh in gratuity and pension commutation. I invested the money in fixed deposit schemes of banks and was content with receiving about 5-6 per cent annual interest. However, last year, on the persuasion of one of my close relatives, I invested about Rs 4 lakh in stocks and mutual funds. But, the recent crash in the market has left me poorer by Rs 1.5 lakh. I am only waiting for the market to rise a little so that I can take out all my money and get out of this business for ever," says Raghubir Singh. Forced by the rising cost of living and falling interest rates in fixed deposit schemes of banks and post offices, the common man suddenly seemed interested in stocks and mutual funds. Applications for opening of demat accounts reached new heights. But now after the May 18 debacle and the decline thereafter, the common man is no longer much interested in the markets.
That the common Indian is shying away from the markets is also indicated by the sharp reduction in demand for opening of demat and tradin+g accounts. "Till the crash, we were opening almost 10-15 demat accounts every day. But, now the number is not even worth mentioning. The average man seems to be afraid of investing in the stock market," says a senior official of a Chandigarh-based stock trading company. Incidentally, such was the panic in the wake of the recent crash that police was deployed at many places, including the Kankaria Lake in Ahmedabad, to prevent investors and loss-stricken broken from taking the suicide route. In Mumbai, a desolate businessman, who had lost over Rs 50 crore in the market crash, tried to end his life by consuming poison. Worried, the Union Finance Ministry stepped in and asked the government-backed mutual funds to pump in money to sustain the markets and ensure that there was no liquidity crisis. But, the mutual funds too have come unstuck when it mattered the most. Most of the mutual fund managers, including those which had a track record of 20-30 per cent annualised return on net asset value (NAV), have started showing signs of anxiety. Faced with an unusually large number of requests for redemption in the initial days of the market crash, the funds also pushed the sell button to meet cash requirements. "Initially, we did receive a large number of redemption requests. But, now it is back to normal. In fact, realising that now is the time to invest, fresh investors are coming to us, though not in large numbers," asserts a senior mutual fund official. That the MF story is also not that upbeat is indicated by the fact that while the BSE Sensex has come down by 26.30 per cent, most MF have lost nearly the same in value or even more. A sample of some prominent MF schemes shows that their NAV fall in the recent times has been at times even more than the 30-stock Sensex (See Box). However, for the stock market, despite the occasional bouts of recovery, the free-fall continues and there are enough indications to the effect that the scenario will remain unchanged for some more time. What has also caused worry is the fact that the decent and above-average quarter-four results of some listed companies have done nothing to stem the tide. While opinions differ on what really triggered the collapse, there seems to be unanimity that the three major reasons were: correction by the markets, pulling out by the foreign institutional investors (FIIs) and the general meltdown in the international markets, though strictly not in this order. "Basically, the bull run was too fast. Look at the figures, after breaking the 7,000-point barrier in June 2005, the market did not break its run. Thereafter, it was a dash for 12,600 points. A correction had to happen. But, I don’t think there is reason for the long-term investor to worry," says Gurmeet Singh Chawla, Director, Master Trust Capital Services. Just consider the facts: the Sensex had taken 48 trading sessions to jump from 9,000 to 10,000 points, 29 trading sessions to take it from 10,000 to 11,000 points. The next 1,000-point mark took even lesser time to achieve. It took all of just 15 trading sessions for the Sensex to touch 12,000 points from 11,000. Chawla says that the first indication that the markets would get into correction mode was provided when global metal prices fell. Thereafter, it was just a matter of time before the markets got into safe mode. He, however, points out that the major markets across the globe, particularly the Asian markets, too have witnessed a sharp downswing. Therefore, in spite of the panic, there is really no reason to worry. "Basically, the investors, who had entered the markets for an easy profit on short-term basis, have been hit the hardest. But, people who invested carefully, after studying and understanding the profile of the scrip in which they were investing, with a long-term perspective will not end up on the losing side. The fundamentals of the market are still very strong," he adds. But, how long will it take for the markets to recover, reach the 12,500-plus mark again? Experts and market watchers, while refusing to give a time-frame, do seem united in their view that the market will "correct" itself some more and then begin its climb. "Forget about all talk of the Sensex touching 20,000 points by Divali, a period which generally sees heavy investment in the share market. It would be great if the Sensex crosses even 12,000 by then," says a share broker.
But, a strong possibility of interest rates in the US being revised upwards coupled with the strengthening of the dollar led the FIIs to start pulling out. Since the third week of May, when the Indian share markets began their journey downhill, FIIs have already taken out over half of their total investment. But, experts are still optimistic that the honeymoon between the FIIs and the Indian markets is still not over. "They are still bullish about India. The fundamentals of the Indian economy are still very strong. Sectors like infrastructure, IT, services, tourism, etc, continue to hold out the prospects of being profitable and growth-oriented. This and the prediction of a healthy monsoon plus expectation of good fourth-quarter results of major companies will surely lure them back. Also, do consider the fact that the FIIs have not totally ditched the market," says Pankaj Shah, CEO, Transwarranty Finance. But, does the ordinary investor need to worry? After all, he has the most to lose if the downslide continues? No, is the emphatic answer from the experts. But, the no comes with a rider: invest very carefully and that too only in those shares which have a strong basis. "The current phase is a temporary one. But, my suggestion to the ordinary investor would be to stop worrying about the index. Consider the history of a company, its stability, its performance. And, then invest in the best shares. Also, invest in a phased manner. Buy, 100 shares today, another 200 after a week, and so on. This will even out the risk," says Shah. Market analysts say that the India growth story is still on; in fact, it has acquired speed. So there is little to worry about. They also say that for the long-term investor, now is the time to buy. "It is a good time to add to your portfolio. The scrips are down. Only be cautious that you chose your stock very carefully," is the talk doing the rounds.
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On
"I will be more
than happy if I get back my initial investment. I have learnt a lesson
that stocks are not for me," says Deepak Sharma, who is employed
with a government organisation.
The
Sensex was also hit hard due to the flight of FIIs. As per reports,
the FIIs, which began investing heavily in Indian scrips at the
beginning of this year, have invested over $ 5 billion.
