The Hindu Business Line : Wall Street will pave way for movement of Sensex

Worried stockbrokers looking at their monitors as the Sensex witnessed a steep fall last week. However, with Friday’s sharp recovery, marketmen hope the trend would continue this week. –

This week, the benchmark index may witness enhanced volatility, but may stabilise later depending on what happens on Wall Street. Local developments may play second fiddle to the developments.

Citigroup, tottering inadequately capitalised, would be watched closely by Dalal Street this week.

Wall Street’s number one bank has its tentacles spread across the geographies. Fall of Lehman Brothers in September had proved to be a turning point in the two-year-long US financial market upheaval that begun with problems over sub-prime mortgages. If the Citigroup crisis precipitates, it could prove to be another turning point.

US authorities would not like it to succumb to losses and write-downs. Actions and Wall Street responses would be crucial for equity markets all over the globe.

A couple of banks, one on both sides of Atlantic Ocean, are also seeing deterioration of health.

At home, market intelligence does not still favour a few private banks wholeheartedly.

A fresh rate cut signal, which was expected on the weekend, did not come about. If it comes, it may not improve the sentiment much.

Lack of confidence

Local brokerages have been extending their downward earning estimates to more and more stocks. Overseas investors have largely gone underweight on Indian equities.

Proprietary investment strategies confirm that very few are willing to bet on upward valuations in the short-to-medium term.

The Finance Minister, Mr P. Chidambaram, has suggested investors not to remain glued to key indices movements.

Indices do not only reflect the fundamentals. Much of it could be imbued by irrational sentiment. When the investor confidence is low, numbers on the indices could be fickle. The opposite can happen when euphoria takes over.

But the investor psychology is to follow price actions when an extreme situation prevails.

That also perhaps answers why pep talks and positive measures have not been restoring confidence.

The crisis of Citi Group, even if handled carefully and fast enough, would leave a scar on the global investment fraternity. This would perhaps further postpone a re-look at Indian equities by global investors.

Leverage worry

According to a Morgan Stanley strategy note, investors have always regarded that India has a bottom-up story influenced by its superior ROE. However, things have changed recently, and India is unlikely to be a bottom-up story for some time — until corporate India has restructured all over again, unwinding both operating and financial leverage.

It expected broad market earnings to decline 20 per cent in FY-2010 and ROE to decline from 22 per cent at its peak to 16 per cent in the coming 18 months.

Morgan Stanley has cut its Asia/Pacific 2009 GDP growth forecast to 5.5 per cent from 6.4 per cent, reflecting downside risks from the global environment. This took 2009 growth estimates close to the trough reached in 2001 at 5.2 per cent.

“We concede that the risks to our estimates are to downside, based on (a) risk aversion in global financial markets being transmitted in the form of higher cost of capital in the region and (b) the impact of an external demand shock,” it said.

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