The Hindu Business Line : It was ‘forced selling’ by speculators

Chennai, Jan. 22 “Please don’t use the word ‘investors’; those who were forced to sell in the last two days were speculators, or traders,” says Mr Porinju Veliyath, Managing Director of Equity Intelligence, a Kochi-based portfolio management service.

He adds: “Genuine investors didn’t have to do anything; they could either sit and watch or buy good stocks which will not be available at such valuations soon.”

Dabbling with derivatives

Both he and Mr Arun Kejriwal of Mumbai-based KRIS said a lot of pain in the market had resulted because retail investors were dabbling with the futures and derivatives segment without understanding the product. Mr Veliyath ascribed “almost 90 per cent of what happened in these two days to forced selling. Those who don’t understand F&O had started punting, just because his neighbour or friend had made money. Powerful operators were short in the market along with the FIIs, so when the market started falling there were huge open interest positions and those in the F&O segment had to either bring in more margins or cut positions.”

The losses suffered by traders in F&O segment triggered more selling in the cash market. “When somebody sold IFCI at Rs 40 today, it was not because he thought it was not worth that price, but because he had no option.”

Making money

Mr Kejriwal said the reduction of the lot size in the F&O segment this January had “lured smaller people into this segment. When the market keeps going up and people make 5-10 per cent profits everyday, they think it’s easier to make money in the stock market than print currency notes. Amidst this kind of euphoria it doesn’t take much for things to go wrong, and it finally happened.”

The fall was triggered, he says, by a combination of three factors — global cues, sucking out of huge money for major IPOs and huge open interest positions. “When the Sensex shaves off 5000 points in 7 trading sessions, even if it recovers by 50-60 per cent, it will just be a numerical recovery, not that in investor confidence,” Mr Kejriwal added.

The fall was compounded by the exchanges not allowing many brokers to trade and the brokers in turn not allowing their clients to buy. “We have a risk management system that tracks our clients and today only those who had credit positions were allowed to buy,” said Mr Ganesh Rajagopalan, CEO of the Chennai-based Anush Shares and Securities.

At the lowest points many more investors would have liked to buy “but unfortunately they were either fully invested or had leveraged positions,” he added.

Even at Geojit Financial Services, said its Managing Director C.J. George, “only those who could transfer cash to our account were allowed to buy today. And some of our HNI clients did take advantage of the low valuations and bought large cap stocks. Those who invest/trade online also came in and bought; we advised our clients to buy fundamentally sound companies.”

Equity funds

Interestingly, mutual funds are seeing both interest and inflow of money into equity funds. Mr Krishna Kumar, Fund Manager, Sundaram BNP Pariba Mutual Fund, said the steep fall in the last few days has encouraged “those who understand the market and who have seen significant corrections in the last few years – 2004 and 2006 included – to come out and buy equity funds. They have seen the benefit of staying invested over a longer period and have confidence that over the long term their investment will do well. We did get a lot of money yesterday.”

He added that one of their marketing outlets in Chennai saw “quite a bit of a crowd. Even new investors … the fence sitters, who wanted to enter but felt the market had run up too much, came in to invest with us because at 15-16 PE multiple levels for next year, they are now comfortable with the valuation levels.”

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