It’ll be a Downhill Ride on D-Street till March

Concerns about food subsidy bill & EU crisis to weigh on Sensex & rupee for some months to come

    An army of jumpy traders dumped stocks on Monday as a debt-ridden government promised to sell foodgrain to the poor at cheap rates. While they cut some short positions during the day to make money in a shallow market, the selling was strong enough to push the Sensex and Nifty down to their 28-month closing lows. Beyond the veneer of main indices, which were down 0.8%, the sentiment was worse, with 158 stocks hitting record lows and three stocks falling for every one that gained. A warning from Fitch about possible credit downgrades of European nations and a bleak forecast on India by brokerage CLSA also contributed to the downcast mood. 

The bleak undertone, deepened by the populist Food Subsidies Bill, was reflected in an ET poll of 20 fund managers and brokers on the stock market outlook for the next few months. According to the poll, benchmark indices could decline 22% by March 2012, after dropping about 25% so far. Worsening debt crisis in the Euro zone, coupled with wobbly finances of the Indian government, tops the list of worries about the market prospects in the near future. 
"We're pessimistic in the near term... We expect a lot of challenges in the first half of next year. December quarter is not likely to be good for companies with respect to earnings," said Sunil Singhania, head of equities, Reliance Capital Asset Management. "The government will have to address every issue possible — from deficits to development — to instil confidence among investors," he said. 
Concerns over the outlook of Indian equities worsened after CLSA's Christopher Wood, in his widely-followed report — Greed & Fear — said the Sensex could fall to 11,000-12,000 and the rupee could decline to 60 in the event of a "violent" selloff amid a potential "euroquake". "What is increasingly worrying from a more narrow market perspective is the potential for a reflexive vicious cycle in Indian assets, be it currency, bonds and equities, where negative news builds on itself," Wood said in a note that downgraded India from "overweight" to "neutral". "The key risk here is the currency, given the central bank's failure to defend the exchange rate more proactively and given the large dollar borrowing by Indian corporates and related "promoters", to use that rather unfortunate term." 
Of the 20 poll participants, four expect the Sensex to be in the range of 12,000-14,000 by March. Six forecast the index to be between 14,000 and 15,000. Expectations of the outlook improving reflected in the Sensex target for December 2012. All 20 participants expect the index to touch 16,000 to 18,000 by next year-end. Food Bill Leaves Marketmen Poorer Rising Bad Loan Fears, High Rates Shock Bank Futures 
Axis Bank hit the most, SBI, ICICI Bank & PNB among major losers NIHAR GOKHALE MUMBAI 
    Futures prices of select bank stocks crashed on Monday as fears of rising non-performing loans and high interest rates turned sentiment against the sector. While bank stocks in the cash market have been touching record lows over the past week, investors offloaded long positions and went short on contracts of large banks like SBI, ICICI Bank, Axis Bank and Punjab National Bank. 
At the end of trading hours on Monday, Axis Bank stock futures closed at . 835.55, at a significant discount of . 15 to the underlying cash price, which hit a 52-week low of . 850.65. Axis has been hit by heavy short selling since Friday, when a record 20% addition in open interest positions was accompanied by widening discounts. 
"There was a combination of short selling and reduction in long positions, as those overweight on the banking sector cut down on their holdings," said Monal Desai, VP and head – institutional equities (derivatives) at broking house Prabhudas Lilladher. 
State Bank of India saw a cut-down in over 1.3 lakh positions in open interest. The contract closed at . 1,626.85, down 2.6%. A discount of . 10 in early trade shrank to zero later in the day which means that traders closed their short positions. Likewise, ICICI Bank open interest reduced by 2.3 lakh, while the contract price declined by 2.3% to . 659.90. 
Some of these banks also have huge exposure to the weak power and infrastructure sectors, worrying investors about a possible rise in the number of bad loans. "Large banks always have a large exposure to the corporate sector. When you've an overall negative sentiment, the same will spread to the large banks," said Saday Sinha, analyst at Kotak Securities. 
Other stock futures facing the heat were Punjab National Bank, which closed at 3.5% down at. 790, and a discount of . 5 to the underlying stock. 
Shares of large banks, both private and public sector, have plunged in recent days with ICICI Bank and HDFC Bank dipping to their 52-week lows of . 641 and . 400.25 on Monday. SBI also slumped to its 52-week low Rs 1,598. SBI too hit a 52-week low of . 1,598, accompanied by a large pack of other public sector banks like Canara Bank, Punjab National Bank, Bank of Baroda, Union Bank of India, Indian Overseas Bank, among others. Bank Nifty index too touched its 52-week low of 7,801 on Monday. 
But it was Axis Bank which continued to face the maximum heat, at least in futures trading. It continues to trade at a discount of . 15. The contract saw 20% addition in open interest on Friday, leading to a record high of over 90 lakh positions. While 6.8 lakh open interest was added on Monday, the total hovered around 90 lakh. This indicates both short selling and exiting in long positions. 
Amit Gupta, head, derivatives, ICICI Direct advised clients in a morning strategy report to go short on Axis Bank futures, and long on Bank Nifty. This means Axis Bank may underperform Bank Nifty during the life of the strategy. "Axis Bank futures are at lifetime high open interest with significant short position. It has been the weakest of the lot. We expect the stock to remain below . 860 in the next 2-3 sessions," he told ET.