Little Pools of Taurine

“The markets are extremely shallow, dominated by a handful of investors with hardly any volume in the cash market and greater volume in the futures market. But nobody’s willing to admit that,” says First Global’s Shankar Sharma. Simply put, the market’s current volatility reflects its vulnerability not just to global cues, but also to movements from a clutch of investors who dominate trade on a daily basis. Of course, there are those who disagree: Value Research’s Dhirendra Kumar argues that the finance ministry data (see graphic) says little about who owns stocks and whether they’re making money out of them.

Either way, there’s no denying that the speculator is king in today’s market. “We have become a culture of instant gratification and we can see that reflected in the market. There are few genuine investors in the market today,” points out Parag Parikh of Parag Parikh Financial Advisory Services. The skew is accentuated by the market’s dependence on FIIs—in the past quarter, domestic institutions have largely been net sellers with FIIs being net buyers. “The sad part is that Indians are not participating in corporate profitability,” says Motilal Oswal’s Raamdeo Agarwal.

There’s no doubt that the optimism behind India’s growth story remains, that the country is still a growing and preferred emerging economy for foreign money. But with the kind of ups and downs the market is witnessing on a daily basis, there’s no clear trendline emerging for the short term. “The markets are range-bound because we’re getting contradictory views from global markets. Some stocks would have moved higher than the indices, but there’s no clear direction emerging,” adds Krishnamurthy Vijayan of J.P. Morgan Asset Management.

But there are clearly concerns given the inflationary pressures in India and the frequently iffy news from global markets. As RBI deputy governor Subir Gokarn points out, “There are risks as continuing global uncertainty or deterioration in global growth prospects may result in capital flowing out. Since January, mixed global signals have been emanating.”

In April, the central bank’s statement said that a modest but more credible recovery could be expected worldwide. However, Gokarn says this seems to have changed in July. “The concern really is about risks of capital flow. Trade is always vulnerable. We have had reasonable export recovery in the last few months but we are getting signals from the ministry of commerce also that this is not something that we can count on to persist if the global scenario were to worsen...this is not a settled environment, so we are watchful.”

With inflation being a key concern for the Reserve Bank, interest and lending rates are set to rise. The next quarter is likely to be subdued. In the past week, India’s 10-year bond yields have climbed to the highest in more than three months. The markets, however, don’t reflect this reality. D.K. Joshi, chief economist, CRISIL, argues, “Stockmarkets are not always driven by fundamentals but also by sentiments. Overall, there is a bullishness about India which seems to be negating the impact of softening profits.”

Consider India Inc’s Q1 results. The top 100 companies listed on the bse posted a 22 per cent rise in revenues in the last quarter. However, operating profits only grew by one per cent. That’s clearly way below analyst expectations. “Typically, Q1 has its own cost implications. So while topline numbers looked decent, we’ve lost the positive effect of last year. A quarter-on-quarter comparison will seem skewed,” points out Motilal Oswal’s Agarwal.

A Cosy Club

Recent finance ministry data for April-June 2010 highlights the stockmarkets’ shallowness

30.9 lakh Total no. of investors who traded on the NSE's cash equity market

5.57 lakh Total no. of investors who traded on the NSE's derivatives market

• 24% Trading in top 10 companies as % of total turnover on the NSE (cash and equity segment)
• 42% Top 25 brokerage firms' share of the turnover of the cash equity segment on the NSE
• 48% Institutional investors’ share of trading in NSE's cash market.

All data for April-June, 2010;
Source: Parliament questions

There are also concerns on commodity prices. Since June, commodity prices have seen sharp swings, making it difficult for companies to hedge in this kind of volatility. Arun Kejriwal of KRIS, a research and broking firm, points out, “So far we haven’t had even one quarter post the complete withdrawal of the stimulus package offered after the global crisis. I think September numbers will tell us the real story; I expect a negative effect on results which will add to the current plateau effect.”

Costs of inputs and raw material are becoming a key concern, with corporates losing their pricing power. So far, companies are absorbing these cost increases—which explains the tremendous pressure on margins. (Though some of the on-hold projects are coming back on track.) Dr Pronab Sen, former chief statistician, adds that although results of Indian companies may not meet our expectations, the overseas investor is happy as the returns here are better than back home.

The next few months definitely spell caution for Indian markets. Market bears like First Global’s Shankar Sharma maintain that, “We are very negative on global equities—if the global markets behave the way we expect them to, then Indian markets will fall very sharply over the next few weeks and months.” Regardless of whether or not quarter results or iip numbers or inflation reflect the true state of the Indian economy, there’s no denying the markets’ dependence on foreign funds. Now that it’s official that the Indian markets are divorced from reality, it makes even more sense to get ready for a rocky ride.

By Arti Sharma with Lola Nayar