Tumble
May 23 (Bloomberg) -- Indian stocks may extend their
three- day, 14 percent slump as some overseas
investors judge local shares expensive given the
outlook for earnings.
``When there are worries about markets around the
globe, clearly the markets that have gone up the most
are going to get hit the most,'' said Arjun Divecha,
who manages the $10 billion GMO Emerging Markets Fund
in Berkeley, California. ``For a year or so we've felt
the market is overvalued.''
Stocks tumbled 10 percent at one point yesterday,
triggering a one-hour halt on both the Mumbai Stock
Exchange and the National Stock Exchange. The
Sensitive Index, or Sensex, dropped as much as 1111.70
points and slid below 10,000 for the first time in
three months after investors were asked to make
additional payments to cover losses.
Shares recovered from their lows of the day after the
government said banks would help investors meet calls
for cash. The central bank backed that up by saying it
would assist banks in making cash available to meet
margin calls. The Sensex ended down 4.2 percent to
10,481.77 yesterday.
The Sensex rose 95 percent in the 12 months to May 10,
when it closed at a record 12,612.38. The benchmark
has dropped 17 percent since then. The measure is
valued at 17 times estimated earnings, more than the
12.9 times for the Morgan Stanly Capital International
Emerging Markets index, according to data compiled by
Bloomberg.
``It's still very expensive,'' said Peter Hill, who
manages the $218 million Highmark International
Opportunity Fund in Foster City, California. ``The
fundamentals are pretty good for India, and it's at an
early stage of getting on this growth wagon. It's not
so much the fundamentals as over speculation in the
stock market.''
`Next Risk'
Overseas investors sold $302.9 million of Indian
equities on May 19, according to figures released late
yesterday from the Securities & Exchange Board of
India, the stock market regulator. That's the most
they have sold in almost a year.
If people who have put their money in mutual funds
``start getting nervous, then you could see a second
wave of selling pressure,'' said David Chatterjee, who
helps manage $700 million of investment in India for
Pictet Asset Management in London. ``That'd be the
next risk.''
Finance Minister Palaniappan Chidambaram said
yesterday there's no cash problem in the stock market
and banks will give ``ample funds'' to pay for shares.
The Indian government, which controls nine of the
country's 10 biggest lenders, said yesterday that
money will be available from banks to cover demand
that may arise from so-called margin calls.
Speculative Buying
Earlier this month, strategists at JPMorgan Chase &
Co. said the rally in Indian stocks was unsustainable
because of rising interest rates and energy costs.
JPMorgan, the third-largest bank in the U.S., cut its
rating on Indian stocks to ``underweight'' from
``neutral'' on May 2. The Sensex's 1000-point jump
from 11,000 to 12,000 between the end of March and the
end of April has been ``swift and furious,'' Bharat
Iyer, JPMorgan's India strategist and research head,
said in an April 25 note.
``The risk-reward remains unfavorable for the Indian
markets in the short term,'' said Sanjiv Duggal, who
helps manage about $1.1 billion for the Japan-based
HSBC India Open Fund in Singapore. ``The rally in
stocks wasn't really driven by fundamental buying, a
large part of it was speculative and leveraged
positions.''
Correction
Only nine stocks representing 30 percent of the Sensex
outperformed the index during the latest rally,
notched up in just 19 trading sessions, JPMorgan's
Iyer said. An analysis of bull markets from 1994 and
2000 suggest that a narrowing of market breadth
signals a correction, he said.
``Economic growth and market growth don't have to move
in tandem,'' Duggal of HSBC said. ``Even when the
Sensex was trading at between 3000 and 4000, the
economy was still growing at a healthy rate.''
The last time the market was suspended because of a 10
percent slump was on May 17, 2004, prompted by the
defeat of the previous government. The day's
cumulative 11.1 percent drop reflected concern that
the incoming Congress party, backed by the communists,
would reverse economic reforms that had spurred the
fastest economic growth in 15 years.
Markets then recovered after the government said it
would continue with economic reforms and push economic
growth.
Some investors predict the markets will rebound this
time around as well, as India's growth story remains
intact.
`Good' Value
India's economic growth averaged 8 percent in the
three years ended March 31, making it the
second-fastest growing major economy after China. The
government is counting on farm and industrial
production to accelerate economic growth to as much as
10 percent a year over the next decade.
The Sensex's 14-day relative strength index, a gauge
of momentum and a tool for forecasting share-price
movements, fell below 30 yesterday. A level below 30
suggests to some analysts that the index is set to
rise.
``The fall is certainly overdone, as was the run-up to
beyond 12,000 points,'' said Navneet Munot, who helps
manage more than $4 billion of stocks and bonds at
Birla Sunlife Mutual Fund in Mumbai. ``The
fundamentals have not changed dramatically and what we
have seen recently is a swift re-rating of stocks. At
current levels, some stocks will hold good value for
investors.''
Munot didn't elaborate on the stocks he would
recommend.
To contact the reporters on this story:
Pooja Thakur in Mumbai at [EMAIL PROTECTED]
Last Updated: May 22, 2006 21:36 EDT
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