CNBC-TV18s Research

The happenings in the equity market aren’t as opaque as they appear to be at first sight. It is up for investors to read through them. And it’s the investors themselves to blame if and when they burn their fingers. The point here is hard hitting but it serves right for those traders/investors who do not look at the general trend in the equity market.

Consider this: the entire Bull Run in the Indian equity market (Apr ‘03-Jan ’08) was on account of liquidity created by foreign institutional investors (FIIs). All investors in the equity market are aware of this factor. The Indian growth story pulled in these monies. But, excessive valuations were created by FIIs only. So, the sell off by FIIs led to the 40% crash from the peak in the Indian equity market.

This 40% correction was in line with CNBC TV18s 8-year equity cycle theory. Post that the 8-year cycle suggests that markets start a consolidation phase in which the equity market drift some 15-25% lower from those 40% lower levels. This would take sometime nevertheless. In the midst, the equity market would continue to remain in a trading range.

Traders would love to play the range, but the huge 20% pull back that we witnessed from the lows was surprising. It was the Indian equity market that outperformed. The pull back was mere speculative and has given way allowing the market to fall back to the 40% lows created in mid-July.

The question therefore is who bought the rally. The answer to that is no one. FIIs, who have always led the rally, bought only Rs 100 cr in the pull back period. Adjust these net inflows to the small IPOs in which they participated, FIIs were neutral in the pull back. MFs adjusted for the few IPOs ploughed some Rs 500 cr. That’s too small an amount for the 20% pull back. No doubt then that the pull back was mere speculative.

Government backed insurance companies are always made scapegoats in such times of crises. No doubt they have been busy forced to shop, but even their numbers do not satisfy the mystic 20% pull back. So, re-confirming the speculative pull back.

Smart money thus could afford to move out at higher levels. The only issue is FIIs exiting at current levels. Though FIIs are facing redemption pressures back home, they are in Catch 22 situation. The rupee is being kept artificially low so that outflows from India are restricted to that extent and in anticipation of inflows. But, the situation world over doesn’t call for inflows as yet and these monies will exit sooner or later. The India growth story stays, but at this point in time there are enough issues from India Inc.

The conclusion is, do not expect a quick recovery. Sell into the rally until FIIs are major buyers. Banks going bust in the US will lead to sell off in India to the extent of their proprietary book exposure. Thus, FIIs buying seems unlikely as of now. That’s the lesson you ought to have learnt long time back. Better late, than never.