Clash of conventions

The recurring volatility in the market is but a reflection of opposing viewpoints about the same trigger

By Mohan Sule

Besides the question whether volatility is here to stay, another issue frustrating investors is the ability of an event that triggers a stock to spurt to cause a sell-off on another occasion. In fact, the different interpretations of corporate actions or policy initiatives are partly responsible for the constant state of fluctuation of the market. Liquidity injection by central banks is supposed to be an extreme measure to poke the economy from its slumber. The step, ironically, cheers the market, anticipating the flow of cheap money. The moment Bank of Japan paused in its efforts to pump money into the system to boost inflation, global markets shuddered instead of taking it as an indicator of the country’s improving health. Doubts about the sustainability of the US economy spur a wave of buying of emerging markets assets. A vibrant American economy, in fact, is beneficial to exporters as they can take advantage of the weak home currencies. The continuing release of the euros in the system by the European Central Bank buoy equities fattened on cheap liquid diet, shrugging off the reality of the region’s fragility. The negative interest rates offered by BoJ are seen unavoidable to encourage spending despite the potency of the move to sow doubts about the future. The current spell of turmoil in the market should temper the bullish or bearish streak of investors: cycles are going to be short and snappy as evident from the turnaround in the prices of oil and other commodities.

The ongoing results season has been marked with roller-coaster moments, once against testifying to the risk of the unexpected reaction to an expected development. The outcome of two banks reducing interest rates is contrasting: there is liquidation in the shares of a profit-making new generation private sector bank but buying of a big PSU lender saddled with huge bad assets. The market obviously feared squeezing of the margins of the private bank known for judicious lending. On the contrary, investors probably viewed the rate cut by the PSU as being an opportunity to its borrowers for refinancing. The normal reaction of investors to disappointing numbers should be to head for the exit as prices might have run ahead in anticipation of a good score card. The downward revision in valuations due to an out-of-line blip, however, can make a sound stock with an optimistic outlook seem a value buy. No wonder stocks of two two-wheeler companies exhibited symptoms entirely in tandem with their past performance but shares of a software giant became eligible to enter due to a temporary setback. The contradictory perception of the market to capital-raising by companies, too, is another enigma for investors. The exercise by profitable companies is taken as a sign of confidence of growing the market share. Another set of companies receives thumbs down as the funds are required to retire debt. Some might feel repairing of balance sheet is a positive development that necessitates a re-rating as it displays the resolve to become lean and fit. Higher provisioning by banks is painful in the short term but considered a necessary surgery. Ironically, PSU banks fitting the category were embraced but not a private sector bank.

In the same way, divesting of non-core assets by a company gets a warm reception by the market, without pondering as to why these businesses were acquired in the first place if not for the pressure of big investors to use the cash in a meaningful way to expand presence. Investors who had earlier applauded a company’s move to integrate, foray into new geographies, expand product portfolio or diversify to protect flagship business become impatient for the management to streamline operations and products. Pledging of shares or paring of stake by promoters is considered as a last resort to stay solvent or loss of confidence in their business. That there are buyers for or lenders against the shares, however, can be construed as the paper being investment-grade. Buybacks also generate conflicting emotions. Companies willing to purchase shares from the open market are often cash-rich, implying a solid footing in the industry. As equity investing looks ahead rather than back, there is also disappointment that the management has not found suitable avenues to earn good returns. Some investors might prefer to stay invested, satisfied with the cash-generation capability, while many others might not want to hold an ill-liquid stock of a company with no idea of what to do going ahead. The market needs investors with opposing investment strategies to create liquidity. But do investors need a market that initially welcomed the plunge in crude prices and is now enthusiastically talking about bottoming out and recovery due to rising commodities?