Stock market indices in India and other major Asian markets plunged on Wednesday as investors worried about the real magnitude of the US credit woes scrambled to exit. The Sensex, the benchmark index of the Bombay Stock Exchange, lost more than 615 points, or 3.9%, and ended the day at 14,935.77. The broader Nifty index of the National Stock Exchange lost more than 183 points, or 4.04%, to close at 4,345.85.
Foreign institutional investors (FIIs) were net sellers to the tune of Rs1,255 crore on Wednesday, while domestic institutional investors were net buyers of about Rs935 crore worth of equities, according to data available on the Bombay Stock Exchange's website. FIIs were net buyers on Tuesday after selling well over Rs1,000 crore each of Indian equities in the previous two trading sessions.
However, FII action in the futures and options (F&O) segment of the market tells the real story—one of flagging interest in Indian stocks in the short term at least. FIIs were net sellers of about Rs1,000 crore worth of index futures on Tuesday, according to data from the website of stock market regulator Sebi. Interestingly, FIIs have been big sellers in the futures market for the past several days. On Friday, 27 July, FIIs were net sellers of more than Rs6,400 crore worth of stock and index futures.
The situation was much worse in some other markets, such as Taiwan, where foreign investors sold about $4.5 billion worth of stocks in the last four trading days.
Stock markets across Asia floundered on worries that the US sub-prime loans (or risky loans) woes were spreading into the prime mortgage market, after American Home Mortgage Investment Corp. stated it had run out of both cash and borrowing facilities. Banks outside the US were affected, too, as they were exposed to either sub-prime loans in the US housing market or to other loans that had been impacted by the re-pricing of risk.
All major Asian indices lost ground on Wednesday. The Taiwanese index, down more than 4.2%, was the biggest loser. Representative indices of China, South Korea and Indonesia, apart from India, also lost close to 4%. While indices in Thailand and Singapore lost more than 3%, those in Philippines and Malaysia shed more than 2%. The Japanese index was also down more than 2%. Macquarie Bank of Australia warned investors of up to 25% loss in two high-yield funds, due to its indirect exposure to the US sub-prime loans market.
Macquarie Bank shares closed 10% lower on Wednesday.
Vanessa Donegan, head of Far Eastern equities and manager of the Asian fund at London-based Threadneedle Investment Services Ltd, says: "Risk premiums have been raised across the world causing volatility in Asian markets. These (Asian indices) have risen strongly this year and investors are sitting on profits which are a relatively easy sell if they need to cover positions elsewhere." Donegan adds that nothing has changed in the region in terms of fundamentals.
"Economic growth remains robust and companies are delivering strong earnings growth. Therefore, we would regard any falls in markets as an opportunity to add to holdings on a medium-term view," she adds. Threadneedle Investment Services Ltd manages assets worth more than $138.2 billion across the world.
Kitty Chan, a director and fund manager at Hong Kong-based CASH Asset Management Ltd, a subsidiary of CASH Financial Services Group Ltd, says the mortgage problems in the US are taking a toll on Asian equities. There are no fundamental problems in most of these markets, she adds. "Global funds are doing risk-arbitrage. The impact of these problems could continue for a few weeks. We expect huge volatility to continue in Asian markets during this period."
Andrew Holland, managing director of Merrill Lynch in India, says Wednesday's dip was a continuation of the severe bout of risk aversion across the globe. "Global credit concerns are forcing investors to book profits and exit high-risk assets such as emerging market equities," he adds.
Traditionally, when equity markets go through bad times, institutional investors seek safe havens in assets such as government bonds and gold. Interestingly, gold prices have also fallen across the globe in the past few days. "Normally, investors flock to low-risk bonds or gold when equities are down. However, this time, the investors are just pulling out cash. There is uncertainty on how long these problems are going to extend. It (cash) could be deployed back to equities, but may take some time," says Holland.
It's not only the stock markets that have been hit. According to the latest global property and REIT report from Standard & Poor's, property indices in the US and Europe have taken a hit while that in Asia remained relatively flat during the second quarter of 2007. The S&P/Citigroup US property index was down 9.4%.
Emerging market currencies, too, have lost ground against the dollar and the Indian rupee ended at 40.45/46 a dollar, down from Tuesday's closing price of 40.3725/3800.
However, most analysts and fund managers expect markets to pull back. Richard J. Hunter, head of equities at UK-based Hargreaves Lansdown Stockbrokers Ltd, says: "The general unease over credit markets is enough to keep the market on nervous alert for a little while yet. However, we remain positive on the market for the rest of the year once this uncertainty has been defined."
Cues from India's derivatives market, however, do not give a positive picture for the next trading session. Nifty futures for August were selling at a discount of 65 points at the end trading Wednesday, indicating heavy selling interest.
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