Mumbai: Indian and Asian markets continued their unpredictable behaviour and fell sharply on Monday in a move that some analysts attributed to fears that the pace of the global economic recovery might not be as fast as expected.
“We can only rationalize ex post,” said V. Anantha Nageswaran, chief investment officer of wealth management firm Julius Baer Group in Singapore, who also writes a weekly column for Mint. “It may be (due to) US consumer confidence (declining), potential fear of Chinese tightening or there are so much of profits to be taken anyway. We can only deduce or guess. ”
Graphics: Sandeep Bhatnagar / Mint
Whatever the reason, the Bombay Stock Exchange’s (BSE) benchmark index, the Sensex, fell 4.1%, or 626.7 points, to close at 14,784.92. This is the steepest fall since 6 July, the day the Union Budget was presented, when the index lost 5.83%. On Monday, the broader 50-stock Nifty lost 192.15 points, or 4.2%, to close at 4,387.90.
The rupee, too, fell to a month’s low past 49 to the dollar, driven by fears of foreign investors withdrawing their stock market investments if growth slowed sharply, while government bonds were subdued as dealers awaited details of an auction due later this week.
“The feeling that the worst is not over for the world is looming large in the minds of investors,” said Arun Kejriwal, strategist at research firm KRIS.
On Friday, a key US economic indicator, the Reuters/University of Michigan consumer sentiment index, slipped to 63.2 from 66.0, below the Bloomberg consensus forecast of 69, suggesting an ongoing weakness in consumer spending in the world’s largest economy. This caused the Dow Jones Industrial Average to drop 0.82% on Friday. That trend continued on Monday, with the index trading at 9,127.93, down 2.1%, at 8.30pm India time.
Friday’s developments in the US meant that on Monday, markets in Asia opened weaker and Indian shares tracked the movement of their global peers. China’s Shanghai Composite fell 5.79% while the Nikkei fell 3.1% despite Japan reporting economic growth of 0.9% for the three months ended June.
Chinese stocks have fallen by 15.8% since the beginning of August as economists and analysts expressed concern of an asset bubble building up in the country—ideal for some monetary tightening by central banks.
On BSE, commodity stocks led the decline as investors feared that the recent run-up in prices didn’t justify the demand outlook, especially for metals. Shares of Sterlite Ltd, the biggest copper maker in India, dropped 7.1%, while those of Tata Steel Ltd slid 6.8%.
Even the price of crude oil is falling. Benchmark Brent crude was trading at $66 (Rs3,214.2) a barrel on Monday, the lowest in a month.
“A lot of commodities are struggling,” said Vetri Subramaniam, head of equity assets at Religare Asset Management Co. Pvt. Ltd.
“Broadly, Indian stocks are moving along global trends. They have been following global cues for the past 12-18 months,” he added, effectively brushing away theories of decoupling, a phenomenon where Indian markets operate independently of global ones.
Baer’s Nageswaran said that the global economy hadn’t improved significantly to justify the movement of stocks. Since 9 March, the start of the current rally, Sensex has gained some 81% after falling by at least a half in 2008. The index is now trading at more than 17 times estimated fiscal 2010 earnings, more than the long- term price-earnings multiple of 14.5.
But in the past three months, since the general election, the Sensex hasn’t gained significantly despite better than expected company earnings and industrial growth in July.
The reason: investors have been concerned by monsoon rains that are 29% below average since 1 June, raising fears of weaker farm output, a big component of domestic demand.
A bad monsoon could knock as much as 1.5 percentage points off growth in the current financial year, economists have said.
“We still expect the economy to bottom out end-2009. Yet, the ride will be bumpier than we thought. Let’s face it: India faces severe drought,” Bank of America Merrill Lynch analyst Jyotivardhan Jaipuria said in a note to clients.
Poor monsoons threaten to hurt sales of consumer goods, two-wheelers, tractors and textiles.
“People are considering the impact of weak monsoons and slower global recovery,” said Gopal Agarwal, head of equity at Mirae Asset Global Investments (India) Pvt. Ltd. “So, profit booking has emerged.”
Reuters’ Saikat Chatterjee, Mint’s Ashwin Ramarathinam and Bloomberg contributed to this story.