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No solution in sight for bipolar Indian stocks

November 20, 2012

(Any opinions expressed here are those of the author, and not necessarily those of Thomson Reuters)

As the end of 2012 approaches, investors will likely remember this as a bipolar year for Indian markets.

A look at the Sensex chart for the year captures perfectly the swings in investors’ mood: from an exuberant January all the way to the despair of June to radiant optimism in September.

Calibrations about the economy, interest rates, and the government’s ability to respond to these challenges have undoubtedly been the key themes of the year.

The wax and wane of sentiment has been a key factor behind the volatility, but another detail appears to have received little attention: the clear downward trend in trading volumes since the start of the year, no matter the mood of the month.

That comes even as foreign institutional investors (FIIs) have bought a net $18.7 billion in Indian stocks this year, showing it has not been near enough to offset what appears to be the reduced risk appetite of domestic investors.

Retail investors are exiting stock markets in droves, driving redemptions to a two-year high in September, which may help explain why domestic institutions turned net sellers in the July-September quarter, according to Morgan Stanley data.

The decline in volumes can’t bode well at a time when the government is keen to sell stakes in state-run companies to bridge its fiscal deficit, and as promoters are due to reduce their shareholdings by next year to meet SEBI requirements.

And it begins to look worse after the most recent Bank of America-Merrill Lynch fund manager survey showed sentiment among global fund managers hit an 11-month low in November.

Reduced foreign buying at a time when domestic investors are reluctant to buy is a potentially toxic combination.

The impact low volumes can have was in stark display when a misplaced basket of trade worth just over $125 million from Emkay Global sent Indian stocks sharply lower in October.

That may have been a one-off. But as investors begin to think ahead to the new year, one trend is getting clear: unless more people start investing into Indian stocks, the big swings in movements are bound to stay, making markets even more bipolar.

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