Blasé Capital MARKET echoes

It is finally the sentiments, stupid! Whatever one may exude about corporate earnings, profitability visibility, macros, headwinds, and so on, recent volatility in specific stocks and stock markets show that emotions are as important, if not more, as the fundamentals. For example, look at the mayhem in Indonesia. For the second day, there was a rout, and the circuit breaker came into play as the stock market index slid by 10 per cent on Thursday. The ostensible reason was that the index service provider, MSCI, warned about the “invest-ability potential” of the nation’s stocks. What this implied was that there were terrible issues with the functioning of the market, which led to non-professionalism, manipulations, credibility, and transparency. Other global institutions like Goldman Sachs and UBS downgraded their respective ratings on Indonesian stocks. Just warnings, and change in perceptions were enough.

However, analysts claim that one of the major issues with Indonesia is about the free float of shares in the cases of most of the listed firms. This means that the number of shares, or percentage of the equity capital, that is available for sale in the open market is limited. The bulk is owned by either the promoters, their loyalists, institutions, and others, who hold on to the shares, and are not sellers. Hence, it is easier to manipulate prices by buying or selling a small number of shares, and indulge in possibly circular trading, i.e., trading among the members of a cartel to show liquidity, and influence prices either up or down. Experts contend that the Indonesian stocks, including the big names, are controlled by a handful of wealthy persons, who can bend the index at their will.

India is considered a highly-mature market, and much-better than, say, Indonesia. Over the past four decades, since the reforms, credibility and transparency are up, and foreign investors seem quite comfortable with the way Indian exchanges are managed. Yet, there are cases, where sentiments and emotions overpower fundamentals, not once by dozens of times, and pertain to specific stocks. After the Hindenburg report on the Adani Group, the stocks of the latter took a huge beating. But, within months, as Sebi gave a clean chit to the group, and the Supreme Court did not pinpoint wrongdoings, the share prices jumped. One of the reasons, say some experts, was that the stocks were thinly-traded, like in Indonesia, and promoters and their friends held 60-70 per cent of the shares. The public float was minimal. It was easy to rev up prices through smaller volumes. In fact, this has become a pattern since then in Adani’s case.

America’s Securities and Exchange Commission (SEC) told a court that India has refused to serve summons to Adani family on a case related to bribing politicians and officials to get nods for green energy projects. Indian officials rejected the summons on grounds like the absence of a seal. The US regulator decided to serve the summons through channels such as emails. Immediately, the stock prices of Adani Group firms tanked by five per cent and more. The group clarified that the SEC summons had nothing to do with the firms like Adani Green Energy, and immediately the stock recovered by five per cent, and more. The point is that the news did not drive the stocks up and down. This is because the Adani clarification was the same that it had issued months ago, and repeated each time there was any movement on the SEC case. It was just pure emotions, not facts, which possibly led to the volatility in the stocks.

Or there may be another reason. A few analysts feel that the up-and-down movements are being synchronised by interested parties. They know that if the stocks gyrate on a whiff of a news, and clarifications, even if they are old or incremental, they can pull gullible investors to buy or sell the stocks. This gives them the advantage to do the opposite, and sell and buy stocks in the opposite vein. For example, the moment SEC stated that it will send summons via emails, the interested parties goad the investors to sell, and get out. The former instead sell at the higher prices, and buy at the lower ones to make a profit, and then wait a day or two for the clarification, and sell again at higher prices. The show goes on and on. The drama never ends. Each time, the foolish get trapped, and the savvy make the moolah.

This has happened in several other instances. In this column, we have talked about the stocks related to the Anil Ambani Group. After declaring bankruptcy in an English court a few years ago, Ambani attempted to revive the group. His sons took control of some firms. Indeed, the share price of a group firm, Reliance Power, has rocketed to new heights in the past 1-2 years. But its story is like that of the Adani stocks. Each time, the banks or Enforcement Directorate (ED) makes a statement, initiates a move, or freezes some assets, Reliance Power slumps, and there is a near blackout. Each time, the Anil Ambani Group issues a denial, or clarification, which is essentially the same that Reliance Power is not involved in the cases, and the firms involved went bankrupt and were sold, the share price props up. This too goes on and on, dozens of times, without reprieve.