why indian stock market is down today
Is Indian market the only one concerned about global developments while all other emerging markets are ignorant? Indian markets seem to have reacted to a China downgrade by S P, a UK downgrade by Moodyвs, and a once-in-a-generation change in the US already named as the вGreat Unwindingв. Foreign investors seem to be selling their holding in the Indian stock markets while increasing it in other emerging markets, especially in other member countries of BRICS (Brazil, Russia, China and South Africa). Apart from India, all other markets continue to remain strong. China equity funds extended their longest inflow streak since the third quarter of 2014 while Brazil equity funds hit a 17-week high on continued inflows. A rally in commodities is helping a sustained rally in Brazil. Chinese markets were higher despite the country being downgraded. Overall emerging market funds posted inflows of USD 2. 7 billion during the week ending September 20, 2017. In the last 38 weeks emerging markets have seen inflows in 34 weeks. In India, however, the story seems to be different. Since the beginning of August 2017, foreign investors have withdrawn nearly Rs 20,000 crore as on September 25, 2017. Debt markets, though, continued to see inflows during this time period. The only reason market has shown some respectability is on account of buying by domestic mutual players who have bought nearly Rs 25,000 crore of shares. However, this is not enough to stop the general market slide. Why is it that foreigners are selling and domestic institutions are buying? One reason that has been attributed to funding managers is that foreign institutions have a choice of investing in various markets and are using this to buy into cheaper markets.
Indian markets trade at price-to-earnings ratio of 24 while Brazil trades at 17 times, China at 15 times, South Africa at 15 times and Russia at 7 times. Clearly, Indian markets are costly, but they have been costly for some time now. What was the trigger for foreigners to sell at the beginning of August 2017? By end of July, the disruption caused by the implementation of Goods and Service Tax (GST) was becoming clear. Many industries were reporting a near clampdown in activity even after inventory de-stocking. Inventory build-up that was expected in the industry would have to wait as the process would take more time on account of lack of operational clarity. GST disruption meant that the government would not be able to meet its GDP guidance. Further, by July, various state governments were announcing loan waivers to the farmers. Though it would not directly impact the fiscal math, state governments who were driving growth would have to slow down. In short, Indian economy was not expected to go anywhere. Corporate Indiaвs profit as a percentage of GDP had halved in the last few years and it would take some more years to recover. Government incentives or a stimulus package, if and when it is announced, will take more time to show up on companies P L. There was no reason for these fund managers to stay in India especially since Brazil and South Africa were showing promise on account of better commodity prices, China was expected to see an election-related stimulus and Russia was gaining for higher oil prices. So, if Indian markets are not looking good why are domestic funds buying?
One reason is they do not have the same option as a foreign fund manager. An Indian fund will have to invest in Indian markets. Though they can prefer to stay in cash, according to reports, cash levels in funds are already high. The record inflow through systematic investment plans is compelling fund managers to buy in stocks where valuations are still attractive. Secondly, Indian funds do not mind staying invested in mid-cap and small cap stocks. The current fall has given them an opportunity to nibble at their favourite counters.
The stock markets scaled new peaks this morning, with the BSE Sensex jumping 300 points and breached 36,400 level and NSE Nifty crossing the 11,150 mark. Optimistic buying activity in the run up to the Economic Survey today and the Union Budget three days later along with good news on GST revenues front has buoyed up trading sentiments. With the IMF also recently reporting "the broadest synchronised global growth upsurge since 2010" and pegging India's GDP growth at 7. 4% in 2018, thus regaining title of world's fastest growing economy, the consensus is that the bulls will continue running amok on Dalal Street for a good while. But not everyone expects the party to last. According to long-time analyst Hemindra Hazari, who publishes on Smartkarma, the surge in the Indian stock market since early 2016 has occurred in a period of stagnant corporate earnings growth-normally the fundamental driver of markets. The election of the Narendra Modi led government, despite major reforms, has not resulted in significantly higher corporate earnings or a revival in the much awaited private sector capital investment.
Since January 1, 2016, the Sensex rose by 38% while EPS from FY2016 to FY2018 (expected) has only gone up 16%. A similar situation is taking place on the global stage, adds Hazari. The MSCI World Index for the advanced economies increased by 27% between January 1, 2016 and December 31, 2017, but its EPS only increased by 10%. While the slow pace of wage growth and inflation-apart from the lack of improvement in the labour participation rate-indicate that the US economic recovery is perhaps the most sluggish ever, the reduction in the US corporate tax rate to 20-21% from 35% may result in higher corporate profits in the near future. This, to some extent, explains the euphoria in the stock markets. "However, the combination of slow wage growth, low labour participation, and a corporate profit surge may not be sustainable. If demand finally fails to show up to the party, the bubble must burst; but when that may be, no one knows, and hence no one cares," Hazari sums up. "We are not excited by the prospects for the Indian equity market in 2018. Either the market will stagnate to allow valuations to fall in line with historical norms, or it will correct," writes another Smartkarma Insight Provider Neeraj Monga in a recent report. "India has benefited tremendously from 2015-2017 with moderate commodity prices and much lower yields worldwide. In the newly emerging paradigm of normalisation of global monetary conditions, India will likely be betrayed at the altar. We suspect that at the first sign of a weakening INR, the sell-off in the Indian equity market could become a stampede," he adds.
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