Mini-bubble bursts, at least for the time being
It is becoming a quarterly feature. Global equity markets had crashed between 5% and 10% in the second half of October 2009. The second half of this month has seen the exact same story. The BSE Sensex and Hong Kong's Hang Seng index were the worst hit with a crash of a little over 7% in a week (see graph below, click on the image to see it enlarged & clear).
A jittery Chinese central bank, uncertain stimulus packages and un-inspiring corporate fundamentals were the major driving factors. But an actual liquidity shake-up was the turning point that made the markets fall continuously for about six trading sessions. "Emerging economies like India had attracted significant foreign equity flows in 2009 and reversal of a part of these flows have likely contributed to some correction in the Indian markets." says Dipen Shah, senior VP-private client group research at Kotak Securities.
The first half of January saw staggering net foreign institutional investor (FII) inflows, collectively on the NSE and the BSE, of Rs 3,042 crore on a single day on 11 January, and an aggregate net inflow of Rs 5,447 crore for the month till 11 January. The tide turned dramatically thereafter and the next 11 trading sessions saw Rs 8,855 crore worth of net outflows. The domestic institutional investors picked up Rs 6,509 crore worth of these outflows but the Sensex still tanked by about 7% in a week as of 27 January.
High global liquidity had sustained the equity markets for over two months till mid-January. There were warnings in November last year that 'dollar carry trade' was causing the liquidity overflow and may not sustain for long. Donald Tsang, chief Executive of the Hong Kong Special Administrative Region of the People's Republic of China, had stated in November last year that the US Federal Reserve’s policy of maintaining near-zero interest rates near zero was leading to excessive speculative capital which could cause the next global crisis.
Warning of the dangers of 'dollar carry trade' Nouriel Roubini, professor at New York University’s Stern School of Business, in a column in London's Financial Times, wrote that "traders are borrowing at negative 20 per cent rates to invest on a highly leveraged basis on a mass of risky global assets that are rising in price due to excess liquidity and a massive carry trade."
Many Indian market participants, however, rubbish the speculation that fears of an unwinding of 'dollar carry trade' due to a strengthening dollar (against other currencies) will lead to further liquidity outflows from global markets. "The equity markets run their own temperatures and had perhaps come too far too fast," says Jamal Mecklai, head of Mecklai Financial, a forex consultancy firm. But, cautions Saurabh Mukherjea, head of India equities at Noble Group, a global equity research firm, "Yes, money will flow out from global equity markets if the US Fed chairman, Bernanke, were to really say that this it the end of low interest rates in the US."
Domestic corporate fundamentals have been neutral. An Enam Securities research, dated 20 January, revealed that out of 41 top companies that had disclosed their quarterly figures for December 2009 about 15 companies saw a decline in net profits as well as net sales. The remaining saw a lukewarm growth.
"Even around the world there were high-profile corporate cases of earnings disappointment and valuations had come to a juncture where earnings had to grow a lot to sustain the high stock prices," says Mukherjea.
Global markets, including India, had recovered on Thursday, 28 January, but the next few weeks will see subdued levels and choppy conditions.