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BW Businessworld

The Nervous Market

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The stockmarkets have been unusually skittish these past few weeks. The BSE's 30-stock sensitive index (Sensex) has fallen from 21005 on 5 November to 19318 on 25 November.  That's a fall of 1687 points — or 8 per cent. What have been the reasons? It has differed from day to day. For example, the Sensex dropped on fears that Ireland would not be able to get out of its mess. It dropped when North Korea bombed South Korea. It dropped on the back of weak index of industrial production (IIP) numbers, and because of the noise created in Parliament on the issue of the 2G licence losses. And it also fell because of news of another scam — the LIC Housing Finance- Money Matters nexus.

A month ago, the sentiment in the market was so bullish that it was shrugging off all bad news. Mega IPOs sailed through. Stock prices kept going up and up. And the crossing of the peak of 21,000 seemed barely days away. What has happened in this short period to make the markets so nervous?

Well, strange as it may seem, nothing much has changed in the domestic economy to merit the reaction. Sure, the IIP numbers were weak — but they were expected. The fundamental economy has neither improved dramatically nor deteriorated sharply. Things are pretty much as they were in September.

The international situation, too, has not changed dramatically. A few months ago, the Indian bourses had shrugged off the bad news emanating about the Greek economy. Taken in that context, the reaction to the Ireland crisis seems somewhat extreme. The bombing of South Korea was obviously bad news but again the reaction seems a bit too extreme.

The one point that has distinguished the current bull run was the bare minimum participation of retail as well as domestic institutions. The rise of the past few months has been on the back of foreign inflows. And as we have mentioned in previous market stories, foreign inflows can turn into outflows for the most irrational of reasons. More important, foreign inflows are also far more sensitive to bad news from around the world than are domestic funds. Senior assistant editor Mahesh Nayak takes a look at the markets in this week's cover story to see what an investor should expect.

(This story was published in Businessworld Issue Dated 06-12-2010)

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