Panic selling leads to sharp fall in share prices: Friday Closing Report

Short rally in the Nifty possible after a few days up to 5,400

Panic selling resulted in the Nifty suffering a major loss of 2.26%, its biggest one-day decline since 4 May 2011. The sell-off happened on huge volumes of 80.37 crore shares, which was way above its 10-day moving average and the index closed at its lowest level in nearly 14 months.

The market is likely to remain down for a few days before a short rally starts. For the uptrend to continue, it is essential that the market closes above the 5,400 level.

The domestic markets opened sharply lower as worries about a serious global economic slowdown sparked a slide in the markets globally. Investors worried about foreign investors pulling out funds from emerging markets and the impact on domestic companies due to the slowdown, particularly in the US and Europe.

The Nifty opened at 5,204, down 128 points, and the Sensex tanked 343 points to resume trade at 17,350. The IT, realty and power sectors led the decline.

After the weak opening the market was range-bound, even as the benchmarks registered high points within the hour. The intra-day high for the Nifty was 5,230 and for the Sensex 17,358. The sell-off worsened around noon and at the lowest point the benchmarks were down by over 3.5%.

The Nifty made an intra-day low at 5,116 and the Sensex at 16,991. A pull-back was noticed as European markets opened with limited losses and the indices recovered more than 1% from the day’s lows to close with a big loss on the day. The Nifty ended at 5,215, down by 117 points, and the Sensex finished at 17,305, a huge loss of 387 points from its previous close.

The advance-decline ratio on the National Stock Exchange (NSE) was 243:1566.

The broader indices were mauled in the market mayhem. The BSE Mid-cap index sank 2.16% and the BSE Small-cap index tumbled 3.08%.

All sectoral indices closed lower with the BSE IT index (down 3.93%) and BSE TECk (down 3.38%) the worst affected. BSE Realty (down 3.13%), BSE Power (down 3.09%) and BSE Consumer Durables (down 2.77%) all lost heavily.

ONGC (up 1.08%), Hindalco Industries (up 0.77%) and Cipla (up 0.73%) were the only gainers on the Sensex. Reliance Infrastructure (down 7.43%) and Reliance Communications (down 7.16%), which will go off the Sensex from Monday, were the top losers. These were followed by Sterlite Industries (down 6.22%), Tata Steel (down 4.48%) and Infosys (down 4.35%).

The top performers on the Nifty were BPCL (up 1.87%), Hindalco Industries (up 1.52%), ONGC (up 1.48%), IDFC (up 0.53%) and Jindal Steel (up 0.27%). The draggers were Reliance Infra (down 7.35%), Cairn India (down 7.18%), RCom (down 6.66%), Sterlite Industries (down 5.79%) and Sesa Goa (down 5.75%).

Markets in Asia tumbled between 1.45% and 5.58% as analysts warned that the US economy may slip back into recession if steps were not taken to strengthen growth and euro zone debt concerns spread to Italy and Spain.

The Shanghai Composite declined 2.15%, the Hang Seng tanked 4.29%, the Jakarta Composite tumbled 4.86%, the KLSE Composite fell 1.45%, the Nikkei 225 slipped 3.72%, the Straits Times retreated 3.61%, the Seoul Composite lost 3.70% and the Taiwan Weighted plunged 5.58%.

On Thursday, foreign institutional investors were net sellers of shares worth Rs254.55 crore, whereas domestic institutional investors were net buyers of stocks worth Rs316.50 crore.

State-run power utility major NTPC is likely to invest about Rs1 lakh crore in setting up a 9,500MW hydel power project in Arunachal Pradesh. The company is in talks with the Arunachal Pradesh government about the project. It also plans to commission a 800MW Koldam project in Himachal Pradesh, next year. The stock declined 3.45% to end at Rs170.95 on the NSE.

Tata Consultancy Services, the country’s largest IT software firm, has earmarked a capital expenditure of Rs2,300 crore for the financial year 2011-12. The company will consider investments or acquisition opportunities in some of the market areas, as and when they arise. The stock declined 3.37% to Rs1,058.90 on the NSE.

GMR Infrastructure is considering a bid to operate airports at Barcelona and Madrid, after the Spanish government authorised a stake sale in the two aerodromes. The company is also looking at bidding for airport projects in Puerto Rico and South Korea, where it has initiated discussions with the respective governments for setting up new airports in these countries. The stock fell 1.16% to close at Rs29.95 on the NSE.


JM merging Nifty Plus with Equity Fund, and Emerging Leaders with Multi Strategy Fund

The fund house says this step will improve economies of scale and better management. But what are the implications for investors in these funds?

JM Financial Mutual Fund has decided to merge JM Nifty Plus Fund into JM Equity Fund (the surviving scheme) and JM Emerging Leaders Fund into JM Multi Strategy Fund (the surviving scheme), in the interest of all unit holders in the respective schemes and to benefit from better economies of scale that will allow for more efficient management. The merged schemes will continue according to their respective dividend and growth options.

Of late, fund houses have started clubbing some of their non-performing, or smaller schemes, into one plan. The market regulator, SEBI, has also supported the move by revising the norms for such mergers.

It is important to monitor your investment closely, and we are not talking only about its market value. Many investors let their investments run on auto pilot, not bothering to check how they are faring. For instance, a merger of two schemes may also mean a capital gains tax liability for you.

When a scheme gets merged into another, the first scheme ceases to exist. In such a case, units of the first scheme are redeemed, but not returned to unit holders. They are then reinvested in the scheme in which the first scheme is to be merged. So even if you choose to stay invested, it is still deemed as a withdrawal from one scheme (the one that will be merged) to another.

In this case, the investor needs to mention his income in his tax returns and pay the capital gains tax (if any). If your investment tenor in the merged scheme has already completed a year at the time of merger, you don't need to pay tax as the long-term capital gains in equity funds is nil.

In case the investor is not in agreement with the merger, he has the option to exit without payment of any exit load. The option to exit can be with or without payment of exit load, according to the choice of individual fund houses.

In the case of JM, unit holders who do not redeem/switch out, the current value of their holding in respective merging schemes as on 29 July 2011 will be converted into units of the respective surviving scheme, through allotment of units at the applicable NAV as on 29 July 2011.

The return of JM Nifty Plus and JM Emerging Leaders since inception till 30 July 2011, is 10% and -13% respectively. (Based on raw NAV.)


If emerging markets crash, will it be the US contagion or home-grown?

Are emerging markets immune from the issues affecting the US or will they be caught in another epidemic—or will the infection perhaps come from another source?

In 2008, when the US stock market crashed, the markets in emerging market countries went down as well. The US stock market has been crushed; first, because of the irresponsible attitudes of its legislators and now because of the possibility of the feared double dip. In contrast, the economies of many emerging markets seem very healthy. In the past the expression was that when the American economy sneezed, the world caught a cold. Are the emerging markets immune from the issues affecting the US or will they be caught in another epidemic or will the infection perhaps come from another source?
The problem with the question is that it makes many assumptions that are incorrect. One of the first assumptions is that the US economy will have an impact on the economies in emerging markets. If we exclude the European Union, the US is still the largest economy in the world. Obviously if the US goes into recession, global demand will decline. But the question is who does that affect and how much?
It would definitely affect the US's main trading partners, but those trading partners are generally not emerging markets. The US's largest trading partner is not Brazil, Russia, India or China. It is Canada. China is the second largest partner as is Mexico, but most of America's trade goes to G7 countries including Germany, Japan, France and the UK. Brazil is a large trading partner, but its total trade with the United States is slightly more than the US's trade with the Netherlands.
China's largest trading partners with the exception of the US and Germany are in Asia. India has a similar profile. The main difference is that some of India's largest trading partners are Middle Eastern oil exporters. The trade that is most important to the emerging markets is not with the US, but with other developing countries. This is especially true for the inter-Asian trade.
We also tend to assume that the world is so connected that problems in the US will carry over to other countries. This also depends on a few factors. Germany and South Korea are major exporters. Over 40% of their GDPs are dependent on trade. Again, both are large trading partners with the US, so a slowdown in America would definitely affect these countries. But others like India and Brazil are not. Only 15% of their GDP is related to trade. The US is even less. It averages about 10% of its GDP. China, the workshop of the world, is heavily dependent on global trade. Just under 30% of its economy is based on trade. So although the US economy is large, it trades mainly within North America.
There is a big difference between the economies in emerging markets and the equity markets in emerging markets. Equity markets in emerging markets are not necessarily accurate reflections of the underlying economies. Often these markets are quite small. Large parts of these markets by capitalisation may be represented by a single sector and often by a few companies. These markets are also heavily dominated by state-owned companies. Added to these issues are problems with liquidity, market manipulation and poor quality of information.
The recent rise of many of these markets has been due in part to the loose monetary conditions across developing countries as much as the growth of the local economies. The huge tide of 'risk on' foreign capital chasing yields may be more important. A 'risk off' trade could devastate emerging markets regardless of the state of their economies.
So if the growth of the US economy stalls, the effect in emerging markets would be felt, but it would not have the impact of 2008. This does not mean that these markets are safe. The difference is that the problems are within the emerging markets themselves. All of these markets are overheating. According the The Economist's emerging markets overheating index, the economies of Argentina, Brazil, India, Indonesia, Turkey and Vietnam have real problems. Almost all emerging markets have raised interest rates some many times. Brazil has raised them five times. India has raised interest rates 11 times. China has raised them 5 times. Many emerging markets are desperately struggling with inflation. Besides all emerging market economies tend to be unstable due to corruption, weak infrastructure, legal uncertainty and political infighting.
Credit bubbles are starting to appear particularly in Brazil and Turkey. The Chinese real estate bubble has been much discussed, but real estate prices are also at new highs in India and Brazil. Some equity markets have pulled back, but Indonesia recently hit a new high. If one BRIC falls, the panic could easily spread to all of the other emerging markets. The American economy is certainly not healthy, but unlike the emerging markets, it does not have a long way to fall.

(The writer is president of Emerging Market Strategies and can be contacted at [email protected]  or [email protected].)


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