Believe It? Or Not?

With rumour mills working overtime and markets reacting instantly, what should an investor do? The media and market are quick to spot changes even before a fi rm makes a formal announcement. Your reactions to such unconfi rmed news or rumours can have serious consequences for your investments. So, how should you react? Well, you should fi rst understand the difference between rumours and unconfi rmed news. Rumours cannot be verifi ed and can emanate from sources such as friends and family, ministry offi -cials, and even the media. However, unconfi rmed stories that appear in the media do have sources – often undisclosed – but there are chances that the moves predicted may not occur. Whatever the news, understanding its effect on the movement of share prices is crucial, say experts. Prices react swiftly and investors hardly get a chance to take stock of the situation.

“Look at the stock price and determine whether the news has followed the price or the price has hatched the news,” says Ajay Parmar, Head, Research, Emkay Global Financial Services. If the market has a negative breadth, positive news may not prop up share prices, but negative news in a weak market could lead to the shares overreacting to it, he adds. Let us look at some common market rumours and how to respond to them.

Sale of Unit, M&As

Rumours that a company could sell its stake in a division or that a foreign fi rm might buy a stake in a domestic company should push up share prices. The idea is that a company selling its unit at a premium will leave the shareholders with a higher share value. But should you buy stocks based on such rumours? If the share price had reacted before the news about the sale of a unit was out, be cautious.

K. Ramanathan, Chief Investment Offi cer, ING Investment Management India, says: “We value companies based on SoTP (sum-ofthe-parts-valuation). We then compare the movement of prices before and after the news comes out. If the price has moved irrationally, we sell.”

Corporate Governance

News such as promoter involvement in a scam or misuse of company funds will hammer down stock prices. However, getting confi rmation of such involvement is very diffi cult. So, judgment plays a crucial role. In a market that has an overall negative sentiment, such rumours can have a domino effect on stock prices. Hence, it is better to sell.

“We would get out of the stock immediately because fundamental assessment will not work in such cases, however attractive a stock looks,” says David Pezarkar, Head, Equities, Daiwa Asset Management.

Plans for Raising Funds

News of fund raising will push up prices, but from a long-term investment perspective, a fresh investment would hardly make sense if the market has already reacted. Any fund raised by a company through equity dilution at a premium to the current market rate will benefi t current shareholders. “Suppose the current market price of a company’s share is`400 and you are buying the share through private placement at `460, then the dilution is less. This will benefi t the shareholder,” adds ING’s Ramanathan. But, it is hard to know at what rate a company will raise funds. It may also decide to raise money through debt instruments rather than a private placement of equity shares. Knowing the price at which the company’s competitor or peer has raised money, and the premium, could give you an idea.

Shares to be Pledged

This will have a negative impact on share prices. Companies usually pledge shares with banks or fi nancial institutions to have easy access to funds, but investors are often wary of such news. It has to be tackled on a case-to-case basis.

In a scenario of rising stock prices, there is no concern. But, if the price of the stock declines to a certain level, promoters are required to make a payment or pledge more shares. If the promoter defaults or is unable to provide further shares as margin, then the lender has a right to sell the shares in the open market.

Usually the quantity of shares pledged by lenders is large, resulting in an erosion of stock price. According to a ICICI Securities research report, companies with a high proportion of pledged promoter holdings are susceptible to such erosion in prices. If you get a sense that the company is fi nding it diffi cult to raise money and meet its funding needs, you can exit the shares and enter at a later time.

Delisting of Shares

Rumours on delisting should not be a trigger to take action on a stock for long-term investors. The uncertainty and the tax implications argue against buying the fi rm’s shares. However, you can invest in companies with good fundamentals if there is a possibility of delisting.

Courtesy: Money Today