It is heart-rending to read human interest stories surrounding the crash of the investment bank, Bear Stearns; its stock was trading at $160 barely a year ago and on March 17, JPMorgan Chase offered to buy the company at a fraction of this share price — $2 a share! Recording the shock waves this bit of news sent within the Bear Stearns’ family, media reports described how more than any other company in the finance sector, here was one that had always encouraged its employees to become long-term investors in the stock. About 30 per cent of the company is owned by its employees, and now their stock is worth virtually nothing.

After days of speculation that the US government would bail out the company, and then the expectation that it would find a buyer for at least several billion dollars, employees and stakeholders were stunned to learn that the Fed had almost held a gun to the leadership’s head and was forcing it to close the deal at $236 million, which put the value of each share at a paltry $2.

Seizing the moment, somebody taped a $2 bill to the entrance of Bear Stearns’ headquarters in Manhattan, New York, to reflect what JPMorgan Chase was paying for each Bear share, and a picture of this was carried by The New York Times. On Monday, responding, of course, to resistance and outrage from Bear investors, JP Morgan Chase indicated that it would increase its bid for the company’s shares from the paltry $2 to a more respectable $10.

While this drama was being played out last week on Wall Street, the bear was on the prowl on Dalal Street too, debunking the decoupling theory vis-À-vis Wall Street and Dalal Street. In a single day, the Sensex lost 950 points. Forgetting the time when projections were being made of the benchmark index climbing the dizzy height of 25,000, gloomy scenarios were being painted across the Street.

Analysing the mood of investors in the Indian market, Mr T. P. Raman, Managing Director of Sundaram BNP Paribas Mutual Fund, said what was worrying was “the extended period of volatility” in the world markets and “investors are wondering why the US government’s injection of huge doses of liquidity and the Fed’s lowering of interest rates were not appeasing the market. Many people feel that unless the root causes of this malaise are tackled, things might not improve.”

Mr Raman says that caught amidst the sub-prime tangle and the woes of the financial system, most investors would wait and watch the quarterly results; “that should be over by April 15 or so and then we’ll see the bigger investors taking a call. But, of course, the question behind everybody’s mind is: ‘Today Bear Stearns, tomorrow who?’”

Coming to investments in mutual funds, he said at the retail level he had seen no redemptions in his funds. “In fact this is a good time to invest in equity funds and I find that the Indian equity investor has become quite savvy, keeps the long-term perspective in mind and we are seeing some inflows.” These are also coming through SIPs (Systematic Investment Plans).

Confirming this trend, Mr Devendra Nevgi, CEO and CIO of the Mumbai-based Quantum Mutual Fund, said his investors had neither displayed any panic nor gone in for redemptions.

“On the contrary, we are seeing marginal incremental flows and SIP investments”, the average size of which he estimates “between Rs 3,000 and Rs 5,000 a month, or even more.” He says that Quantum does not have marketing agents and does not charge an entry load; “thanks to our low-cost and long-term investment model, we don’t go with the flow of the market. We don’t jump onto the table when the market goes up, nor do we jump into the sea when the market is down. Also, we don’t go in for momentum stocks that can go up or down by 30 per cent. And our investors are fully aware of our model, where a long-term outlook is encouraged.”

Mr Nevgi says his benchmark is the BSE TRI (Total Return Index) “and we don’t specifically go in for Index stocks. Our strategy allows us to ride such cycles in the market and our strategy is conveyed to our investors, who stay with us during different market phases.”

He adds that when the Sensex was at 21,000, Quantum was sitting on 8-10 per cent cash; “we’ve been putting in money gradually as we find value and today we have about 3 per cent cash.”

Mr Arun Kejriwal of the Mumbai-based Kejriwal Research and Investment Services thinks “we are in the last leg of pain. We have seen in the past too that just when everybody is talking of the doomsday scenario, markets turn around and recover.

“If you look at it arithmetically, we are not too far away from the time — January 2008 — when the Sensex had touched the 21,000 mark and people were talking about the 25,000 mark! And, now, they turn around and talk about 9,000!”

He added that, for sure, the US economy had moved into recession and “even though we are not directly dependent on the US, there might be some more pain for us. What people in India do not understand is why the US is chasing the 123 Agreement. They need it desperately; they want to sell us their uranium, come what may.”

His advice to Indian investors: Don’t panic, put in some money — but strictly no borrowed funds — little by little into fundamentally sound companies in capital goods and engineering and public sector banks.

“As for IT, even though the valuations are good, because of the weakening dollar these companies might continue to be vulnerable.”

What is most surprising is that as the Sensex hovers around the 15,000-mark, there are no horror stories from retail investors this time, unlike when it came crashing down from 21,000 to 18,000 levels.

But, then, as Mr A. K. Narayan, President of the Tamil Nadu Investors Association points out, most of the speculators who used to leverage small amounts of money, quite often borrowed, into the Futures and Options segment, have been flushed out of the system.

“They don’t have any more money to trade/invest and that is why we are not hearing horror stories. But the mood among retail investors is rather nervous; they are not as comfortable as they used to be. And adding to the nervousness are all kinds of doomsday projections of the Sensex hitting the 8,000-10,000 region.”

He says the primary objective of retail investors now is to protect their capital; most people he knows have postponed their buying decisions and are holding on to their money hoping for better valuations and waiting for the market to stabilise.

But the worst hit, he points out, is the “sentiment in the IPO market. Today the price of REC has come down to Rs 93-94, well below its issue price of Rs 105, so the mood is very sombre.”

Those who did not get allotment in the heavily oversubscribed IPO are obviously rejoicing as they can now buy the share 10-15 per cent cheaper.

So are we in a bear market now?

“I really don’t know, compared to last year’s 10,000 mark (on the Sensex) which we were celebrating, we are still at 15,000, so it’s all very relative.

“But the correction phase has really begun, and if the FIIs continue to pull out money, then there will be more pain”, says Mr Narayan.

His advice to the 715 members of his association: Stay put, watch the market for two months and then decide.

The last word should go to horror stories. The gossip mill in Mumbai says some of these might be reserved for brokers who did not buy shares even for those investors who had credit in their account during the worst falls.

Several such clients are suing their brokers and when judgements are out, the horror stories could be on the other side of the counter.

Also, one wonders about the defaulting investors... those who had made their brokers buy the shares, but have since then disappeared, not answering their mobile phones or being found at home!

More Stories on : Financial Markets | Stock Markets | Insight

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page