10 drowning st

MUMBAI: Stock markets are known to defy logic. In early January, when stock prices were at stratospheric levels, the street was betting on the Sensex topping 25000. Six months on, the irrational exuberance is gone. Instead, there is a paranoia and some doomsayers are now predicting that the benchmark index will slide to 10000 before long.

The growing sense of gloom is reflected in the reports put out by a few prominent brokerages which have set a target of 12000 for the Sensex.

On the face of it, almost all factors — technical and fundamental — point to the market sliding further in the coming days. The Sensex has breached a key support level of 14000, and the Nifty is precariously poised above the 4000-mark. The worry lines are in the form of soaring domestic inflation and global crude oil prices and the shadow of early polls.

With rising interest rates threatening to put the brakes on local consumption growth, the operating margins of companies are already under pressure. Against this backdrop, analysts are not expecting the first quarter corporate earnings to provide any cheer either.

Several foreign institutional investors, once die-hard fans of the India growth story, are now fleeing in droves. Local mutual funds and insurance companies, on the other hand, have been net buyers of equities for the past few months, but that has had little impact on prices.

The scenario in global markets, too, is bad if not worse. According to Emerging markets Portfolio Funds Research (EPFR), investors have pulled out in net terms over $12 billion from emerging market equities during the first half of 2008 compared with a net inflow of around $2 billion same period last year. Developed markets fared no better, with net outflows totalling $104 billion for the half year, so far.

Given this gloomy scenario, is there any hope of salvation for the bulls? But just like cricket — the other national obsession — stock markets, too, are marked by glorious uncertainties.

Some contrarians feel that the pessimism now on display may have been overdone. Inflation fuelled by high oil prices has been cited as one of the main causes for the turmoil in the equity market. But according to some experts, it is not the absolute headline inflation number that is doing the damage.

In fact, it has been the rapid pace of the rise that has raised concerns of policy intervention by the government, which, in turn, could hurt corporate earnings in several sectors. And the massive selling by foreign funds over the past few months is likely to provide the foundation for the next round of upswing.

In the past couple of months, many hedge funds are said to have been going short on the Indian market by borrowing shares from foreign portfolio investors who are allowed to issue participatory notes (PNs) — derivative instruments which have as their underlying Indian stocks.

Since the PN-issuing foreign fund transacts on behalf of a number of overseas clients, and retains ownership of those shares, it has an assorted inventory of shares at its disposal. It can then lend these shares to those overseas funds which are looking to go short on the market, for a fee.

What is more, even those FIIs registered with Sebi, and which have presence in international markets, can borrow shares from a PN-issuing competitor through this offshore route. The steep fall in stock prices of sectors like realty and banking shares is said to be the handiwork of hedge funds who have been borrowing shares and then dumping them in the market.

Besides, some prominent market operators too are said to be heavily short in many frontline stocks. These players had covered up a part of their positions during last week's panic, but continue to remain bearish on the market.
Broking circles say that the market now looks oversold, and a whiff of positive news could spark off an all-round scramble to cover up short positions, thus sending stock prices shooting through the roof.

One such trigger could be a significant softening in crude oil prices. The market is already factoring in the worst — even $175 to the barrel — and in the event of oil prices slipping to $125 or thereabout, there could be an improvement in sentiment globally.

There is also a view that in the event of a recession in the US, investors may see China and India as relatively safe investment havens considering that these two countries have been fastest-growing economies in the world for a while. Given the worsening fundamentals back home, it is still possible that bears may have the last laugh after all. But it's unlikely to be an easy victory for the