It took 33 trading days for the Sensex to rise from 10,941 on March 20 to its closing peak of 12,612 on May 10. But in just seven trading days, the Sensex returned to 10,939, falling 826 points on May 18 and 453 points yesterday. We all knew this linear trend had to reverse some time in a market that has jumped four-fold since 2003, doubling in the past 12 months alone and delivering 60 per cent compounded average annual returns over the past three years. But the last two days’ 10.5 per cent fall has been unexpected. To put that in perspective, this 1,279 point Thursday-Friday fall was the value of the Sensex 16 years ago (on September 10, 1990 the Sensex stood at 1,283). The two Great Falls of May 17, 2004 and May 18/19, 2006, have two things common. One, they have been attributed to FIIs selling. In the former 793 point, 15.6 per cent intra-day fall, the reason was the ‘bhaad mein’ syndrome that the Left, exerting its new-found power over financial markets, could take credit for. The May 18/19 fall has been attributed to a CBDT circular that proposed to increase capital gains tax on FIIs, from 10 per cent to 41 per cent. This ad-hoc and unexpected increase would squeeze the Emerging India premium out of their portfolios. I expected the markets to turn as Finance Minister P. Chidambaram clarified the matter but the next day, when the Left sought to re-introduce long-term capital gains tax on TV, the sentiment fell again. Two, in both these falls, the blue chips, the frontlines, the highly liquid counters have been beaten down. This is different from all earlier falls, when money has moved from illiquid mid-cap and small-cap shares to blue chip companies that were seen to be safer, ‘defensive stocks’. That is, while the frontline stocks fell, the crash was bigger in smaller stocks. That’s not the case today — the fall is across the board: from the Sensex and the Nifty to BSE 100 and sectoral indices, the downward trend hovered in the 5-7 per cent range on May 18 and in the 4-5 per cent span the next day. This tells us that the prime driver on our stock markets is a short-term, highly sensitive herd. A group of speculators that do not have long-term appetite for stocks. An influential drove of dollar-leveraged arbitrageurs, borrowing cheap from global markets, investing in emerging markets like India, factoring in the currency and country risk into their return ratios — and scooting at the first sign of trouble. That’s what traders, Indian or international, do for a living. Before economic jingoists begin to condemn them, one thing needs to be made clear: in a market, any entity or a group of entities will have only one motive — profit maximisation. If it chooses not to ride a long-term story it has that right, just as smallest of small investors, the most gullible of them all, does. Traders don’t like uncertainties because their short-term vision backed by short-term funds sees merely short-term profits. Or, as in this case, losses. Any event that comes in the way of this monthly/quarterly eye-span, gets multiplied. (Not so for a long-term investor, who sees and seeks rainbows at the end of a longer walk, who is not forced to turn back because of a river, who in fact rides the river or builds a bridge over it, keeping that rainbow in sight.) If traders’ investments are of a speculative nature, it’s no crime. If they’ve borrowed to invest, they are more vulnerable to swings and will move money out faster, at a lower return to avoid default. In the process, if they make a loss, as many would, it’s their business, their loss and something they’ve accounted for. In fact, the presence of short-term, leveraged traders is a boon to long-term investors. Not only do they help create and preserve liquidity so the buy-sell differential is low, they present opportunities like May 18/19 that allow long-term investors to pick up great companies at throwaway prices. The problem comes when traders are branded evil. That they belong to the ‘dark side’ comes to life at the tail end of every upward climb. Yesterday, investors were cheering as the Sensex rose, regretting that they were not part of that ride, wondering when they should come aboard. Overnight, that cheering has turned into jeering — the market is manipulated, traders have made their profits, leaving investors in the lurch. Underlying this attitude is our love for the predictable. Which is something that is embedded in our financial DNA — the safety of government-backed returns or fixed and ‘secure’ returns from bank FDs. Again, please, let’s not make value judgments. Each household has its own risk profile and if a family has no appetite or capacity for taking risk, it has the safe but low-return default option. The problem is when we twist and transpose this option on a volatile entity called the market. To expect the market to deliver very high but safe, predictable, assured returns is like entering a hungry, man-eating lion’s lair and asking him whether he’ll have grass for dinner. And when he says, “no thanks, I’ll just make do with you”, cry foul. On any trading day, when millions of shares worth around Rs 15,000 crore in thousands of companies are traded, and when for every buyer there’s a seller and vice-versa, seeking to make a profit, the only dictum that rules is: expect the unexpected. When the market was moving in just one direction, up, investors were worried whether it would fall and revert to its mean — a rise of 4.2 per cent per annum between the two peaks of 1994 and 2000, a fall of 19 per cent per annum between 2000 and 2003. It didn’t. Riding new expectations backed by profits performance, the market rose, from a PE of 13-16 times between 2003 and 2005, to 20 times today. We said that was unexpected. Today, when the trend has reversed, and rather sharply at that, we hear cries of consternation again. Of course, it’s unexpected — that’s the way markets are. But instead of looking at it as a hostile entity, if investors embraced this uncertainty, this crash by picking up opportunities it has thrown up and waited for the long-term Emerging India story to play out, the profitable returns would be equally unexpected. gautam.c@expressindia.com
