The Hindu Business Line : `Derivatives require more attention than small stocks'

A more urgent focus is required on the effect of a huge derivatives market on the cash market — given the magnitude of open positions and contracts.

THE following are the views of Mr Chetan Sehgal, Director, Research, Franklin Templeton Investments: The great mountaineer Mallory was once asked as to why he wanted to climb Everest and his immortal reply was "Because it is there".

Such has been the market frenzy that every target offered to the market has been climbed. As we scale new peaks and see new ones, they become targets to achieve — in crowd behaviour this is akin to mimetic contagion — if this can be here — why not the other one; if he can do it, why not anyone else?

Most commentators on popular channels end up offering targets and the market absorbs the targets into its own logic.

Thus we tend to start anchoring our thoughts to what we recognise. Of course, a question on every one's mind is whether a correction is due and when it will happen. One can always safely make a comment on one of the two aspects of the question — yes, a correction will happen, but one cannot say when.

Oil seems to have stabilised — but, then, nobody expects it to decline to levels where it was just some few months back — and long-term estimates are being revised upwards. Similarly, we are used to high commodity prices and now believe that this is the new reality.

So also the Sensex levels. A march to 7500 a few months back would have been considered a great rally — now a horrible correction. We all know that asset prices are more volatile than intrinsic value — at some stage it would not be irrational to expect that.

SEBI is trying to ensure that it does "all" to regulate the market — so that when the correction comes, things would be orderly and small investors would not have to bear the brunt — so that no scam occurs.

Focusing on small stocks is important from the point of view of manipulation. But probably a more urgent focus is required on the effect of huge derivatives market on the underlying cash market — given the magnitude of open positions and contracts. After all no tail should be able to wag the dog — unless Mallory's quip is more immortal than the man.

Franklin Templeton outlook: Our medium to long-term view on the economy and the market continues to be positive given the strong fundamentals.

However, given the overtly optimistic view taken by investors, there is a risk that the earnings growth might not match the heightened expectations in the coming quarters. Given the limited free-float left for global managers, the supply of paper has to go up to match increasing overseas demand.

With markets touching new highs every week, there are companies without good fundamentals also gaining due to the buoyancy in the markets. Hence, investors need to be choosy about the companies they are investing in, especially in the mid- and small-cap space.

(Edited extracts from the latest monthly report of Franklin Templeton Investments.)

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