High-beta stocks crash land as investors pull out

The recent decline in the market has heightened investors’ aversion to the so-called high-beta stocks, which rise or fall faster than the broader index. Brokers said that many clients were asked to liquidate their positions in such stocks, as calls for margin payments in Tuesday’s fall could not be met.

“We are asking some of our clients who are leveraged in the derivatives segment to either pay the additional margins to maintain the positions. We have liquidated positions of those who could not pay up on time,” said a dealer, who handles wealthy clients at a domestic broking firm.

The beta compares the sensitivity of a stock’s price movement with the broader index. Higher the beta, higher will be the volatility in the stock price, and hence, riskier the investments. The beta of the index or the market is pegged at 1.

“Some of the clients had to liquidate positions at lower prices due to mark-to-market pressures. While until morning, there was no panic, the sentiment turned negative, after the Nifty and the Sensex fell from the psychological levels of 4800 and 16,000, respectively,” the dealer said.

Some of the stocks in the high beta sector, like metal and realty, have seen significant corrections in the past few months. Stocks like Sesa Goa, Hindustan Constructions, SAIL, Orbit Corporation have gone down over 25% in the past two months alone. While others like Educomp, Rain Commodities, Hindalco and Hindustan Copper have fallen over 25% since the beginning of this year. Compared to this, the Sensex has declined about 8% in 2010 so far.

The continuous adverse developments in global markets particularly had caught most analysts by surprise who so far have been saying that India may not be impacted by the European crisis.

Tejas Doshi, vice-president-research, Sushil Financial Services, says, “We need to take a stock-specific approach at this time. Also, if we like a stock, we should not try to time the market. We are advising clients to buy selective stocks in PSU banks, infrastructure, construction and the capital goods space. Secondly, in case one wants to invest in the commodities space, invest in companies having their own mines, present in lowest of the cost quartile with global scale capacities and having strong balance sheet, like Hindustan Zinc and Sterlite Industries.”

Analysts advise caution while dealing with high-beta stocks. Gurudatta Dhanokar, technical and derivative strategist, Almondz Global Securities, says that the trend in the Nifty looks down only till the time the global markets are under pressure. “If someone wants to trade the high-beta space, he should do through buying out of the money calls as the premium is low. Investors are already ‘long’ should put stop losses in place, while those who want to create fresh position should do so only after waiting for the markets to stabilise.”