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Hedge funds at the heart of market turmoil

The savage correction razing stocks across the board this week has been triggered by many factors including an exit of funds triggered by a rise in Japan's yen, macroeconomic concerns at home and prospects of a slowdown in China and the US, but among the key figures that have caused the turmoil are regulation-wary hedge funds which have been quietly operating in Indian stock markets.

“The long term India growth story remains strong. However, in the short term of three to six months, the stock market will move either sideways or even witness some more corrections,” said Bharat Banka, group head, finance, AV Birla Group.

Though shadowy in their operations because of participatory notes (PNs) that act as a cover for them, hedge funds are believed to be key players, but they face, as they do across the world, increasing regulatory scrutiny that makes their movement fragile and risky.

At least 40 per cent of foreign fund inflows are accounted for by hedge funds through PNs, said a leading finance expert, who did not want to be named.

A key factor this week is that many stocks have gone back to or below the levels they hit last May, when the market saw a plunge despite the “India story” based on high economic growth and solid corporate earnings.

“With the rising risk premium and amid regulation issues, hedge funds or PNs, which command more than 50 per cent of the inflows to the Indian market, are either reluctant to take fresh exposures or are withdrawing from the market,” the US-based head of a leading hedge fund with active exposure in India told Hindustan Times on condition of anonymity.

There is fear that the world’s two largest economies, the US and China may witness a slowdown. Beijing is facing Washington's pressures to devalue its currency, which can hit China's export-centric growth, the fund manager told Hindustan Times. Emerging markets such as India are at the receiving end of the cascading effect triggered by such fears.

“The current trend is the culmination of many factors,” said R Sreesankar chief investment officer of IL&FS Investmarts. “Because of rising risk, premium liquidity has dried out. Domestically 9 per cent growth is simply impossible with a 11—12 per cent lending rate.

“Meanwhile, many companies have embarked upon massive capital expenditure. These are some of the signs, which clearly indicates that there will more pain in the market,” he said.

Small and mid-cap stocks have been the most devastated in the current correction. The BSE Sensex has lost 2,308 points from its all-time peak of 14,723 on February 9 to 12,415 on March 5, a loss of 15.67 per cent. Some 135 stocks from BSE 500 has lost more than 20 per cent. In fact, 32 companies from this group have lost more than 30 per cent since then.

Compared with May 18, 2006, when the market was down after a big correction, many of the stocks are currently trading at substantially lower levels, particularly in the sugar and real estate industries, which have been the target of heavy speculative positions.

Sugar stocks, such as Shree Renuka Sugar, Sakthi Sugar have loss as much as 75 and 70 per cent respectively. The top five sugar companies have lost between 64 to 75 per cent since May last year.

Subir Gokarn, executive director and chief economist at credit rater and economy researcher CRISIL said that the interest rate is expected to remain high in the short term.

“Reserve Bank of India projected a GDP growth rate of 8.5 per cent with inflation of at sub five per cent. As long as any of these two – inflation and growth—is beyond the projected figure, the central bank will continue to intervene either through sucking liquidity or hike the interest rate.” he said.

Source : Hindustan Times

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