The majority of exchanges in the Asia Pacific region have seen a decline in share turnover velocity in the past few months. This includes India?s benchmark indices, Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE).
Share turnover velocity is the ratio of traded share turnover (annualised) to the market capitalisation and is an indicator of the breadth and liquidity in the market.
According to data compiled by FE, share turnover velocity on the NSE and BSE combined has declined sharply in the last one year. It is down to 45% from the 92% levels seen in June 2008.
Also, with the exception of a select few markets like China, Korea, Tokyo and Australia, share turnover velocity has dipped the most in Asia-Pacific markets for the period between January and April this year, Bloomberg data shows.
The ratio has declined in excess of 20% on the Taiwan stock exchange, the stock exchange of Thailand and Colombo stock exchange. While the BSE has shown a marginal decline of 0.6%, the ratio on NSE has declined by 9.3%.
?A low ratio indicates that investor confidence in the market is low,? said Ravindra Nath, head of institutional equities at Asit C Mehta Intermediaries. ?Fresh inflows have been limited and trading activity has declined considerably.?
?One reason for a low ratio is the declining turnover on the exchanges in the past few months. It is clear that institutional investors have been staying away,? said Sashi Krishnan, CEO, Bajaj Allianz Life Insurance. Foreign institutional investors (FIIs) have sold shares worth R266 crore in the year till date compared with net purchases of R1.33 lakh crore in 2010.
A lower turnover velocity drives up the impact cost.
?As traded volumes decrease, impact cost increases. The fewer the transactions, the poorer the price discovery,? said Krishnan.
According to Nath however, price uncertainty rises with the decline in turnover velocity. ?You won?t get the price you see on the screen. This can make a huge difference while executing large institutional transactions.?