Despite central banks across the world joining efforts to ward off credit crunch worries, global equities continued to bleed on Friday as fears of a liquidity crisis gathered strength and investors sold in most emerging markets.
Opening the day lower by 425 points, the Bombay Stock Exchanges’ Sensex oscillated 331 points during the day before settling at 14,868.25 points, down 231.90 points, or 1.54 per cent from the previous close. The broader Nifty of the National Stock Exchange ended the week at 4,333.35 points, 1.59 per cent lower than the previous close.
"Global liquidity is linked to the sub-prime market worries in the US and Indian markets are a function of flows from abroad. The crisis has affected the risk appetite and money flowing into equities worldwide, including the Indian market," said Shriram Iyer, executive vice-president of Edelweiss Securities. All indices in the Asia-Pacific region ended the day lower, recording losses ranging from 0.10 per cent to 4.2 per cent.
A correction in equities triggered by increasing defaults in the riskier credit segment in the US (sub-prime mortgages are loans to people with a weak credit profile) last week snowballed into a deeper cut across markets. The fever spreading to global equity markets also forced foreign portfolio investors to retreat from several emerging markets to meet redemption pressures in their home country.
While French bank BNP Paribas froze $2.2 billion in three funds with exposure to US sub-prime mortgages, US-based lender NovaStar Financial on Thursday reported a second-quarter loss of $52.9 million owing to rising defaults. Alike events magnifying fears of a global liquidity shortage and a resultant slowdown in the world economy, saw investors shun riskier asset classes and move money to safer havens like government bonds and debt securities.
Brokers advise investors to stay away from any speculative investment, warning of the possibility of a further fall.
“Funds are facing redemption pressures and they may have to sell. If foreign money does not come in at lower levels, domestic investors, both retail and institutional, may also start selling, expecting no immediate upside,” said a broker who deals for foreign clients.
According to data available on the website of the Securities and Exchange Board of India, foreign funds have been net sellers of Indian equity worth Rs 1,492.70 crore in just seven trading sessions in August.
However, experts expect the market to reveal the real depth of the correction, if deeper, by August 15--that is when hedge funds start paying out on redemption applications received in the July quarter.
"Post August 15 people may queue up for redemption in hedge funds. That may lead to a cascading liquidity withdrawal syndrome across emerging markets," said Seshadri Bharathan, director, Dawnay Day AV Securities.