FE Editorial: Making sense of Sensex

Written by The Financial Express | Updated: Jan 29 2010, 02:35am hrs
In just six trading sessions, the benchmark BSE Sensex has now lost close to 1,200 points. On Wednesday, bears completely weighed in on the markets with the Sensex shedding around 500 pointsthe biggest single day fall since August last year. How does this slide tie in with the impressive third quarter corporate results that have largely showed robust topline growth across industries For one, a potential hike in interest rates may have dampened sentiments. Indian markets are gradually factoring in the risk of tighter monetary policy as a Bloomberg poll of market analysts shows they have dropped their buy ratings to 49% of the total recommendations, the lowest level since 1997 and down from 59% last year. Second, concerns remain on the profitability of companies in the quarters to come because of the steep hike in commodity prices, which are now building pressure on operating margins of companies. Stocks of metal, auto and consumer goods have taken a major beating at the boursesthese were the stocks that saw a major rebound last year and companies in these sectors have been reporting an all-time high bottom line growth this past quarter. Basically the earnings cue is over for them; the market is pricing the stocks on expected future returns amid costlier funds and possible withdrawal of tax cuts. Investors are taking their money off the table. This is also visible in the sell-off in the bond market, though it recovered slightly on Wednesday.

Local concerns aside, global cues also played a part in the slide of the markets amid concerns that China will curb bank lending to prevent any inflationary shock and mounting speculation that the US Federal Reserve may soon consider raising interest rates. The Obama proposals on banking regulation have also sent markets tumbling this past week. In India, of course, it is reasonable to assume that after a huge run-up in stock prices and earnings, there would be some scope for investor fatigue. The government hasnt announced any major reform measures thus far and disinvestment is still a piece of work in progress. The markets will now look for positive cues from the budget especially on indirect taxes, but also on other reform announcements. On the FIIs front, there is clearly some regional selling in India, which is also affecting domestic institutional investors demand. The year 2010, for now, therefore looks tepid for Sensex, which had reported an 81% return last yearthe second best in two decadesas investors decide to likely limit their exposure to what are perceived to be somewhat overvalued markets.