Mumbai: Indian stocks fell to a three-month low on Friday, part of a worldwide sell-off in equity markets on fears that some European nations may default on their debt payments, raising questions about the economic recovery. As foreign institutions continued to sell, the Indian currency hit a five-week low against the US dollar.
The Bombay Stock Exchange’s (BSE) benchmark equity index, the Sensex, fell 2.68%, or 434.02 points, to close at 15,790.93. Market breadth was negative: Of the total 2,902 stocks traded on BSE, 2,368 declined and 487 advanced, while 47 closed unchanged. The National Stock Exchange’s (NSE) 50-stock Nifty breached the 4,800-level to close at 4,718.65, down 126.70 points. Other emerging markets such as Thailand and Hong Kong fared similarly. The Hang Seng Index lost 3.33% while China’s Shanghai Composite lost 1.87%.
Graphic: Yogesh Kumar / Mint
The slide in Indian stocks mirrored losses elsewhere as the MSCI Asia Pacific Index tumbled by the most in 10 weeks, extending a global rout.
From its recent high reached in January, the benchmark index has fallen 10.79%, wiping away Rs5 trillion of investor wealth on paper. This correction is deeper than the 6% fall in November, during a similar financial crisis in Dubai.
NSE’s volatility index (VIX) has been steadily climbing in the past two weeks. On Friday, the VIX jumped 13.89% to close at 30.07.
Investors expect the volatility to continue even as they wait for more clarity on the hit that banks and financial institutions will take from their exposure to Portugal, Ireland, Greece and Spain.
“Given the news flow, possibly it might fall more,” said Vetri Subramaniam, head of equity assets at Religare Asset Management Co. Pvt. Ltd. “We will see volatility for a while.”
“Judging from market valuations, I sense quite a gap between consensus market expectations and key political and economic realities, especially in the US,” wrote Mohamed A. El-Erian, chief executive officer and chief investment officer of Pacific Investment Management Co. Llc, one of the world’s largest funds, in a 3 February newsletter. “If the gap isn’t bridged by the validation of the more optimistic expectations, investors may well find that January’s global equity sell-off was just a precursor to a disappointing year for several asset classes.”
International news flow is negative. The US unemployment rate fell to 9.7% in January, off a 26-year high of 10% in December, but Spain is stuck in a recession and there are concerns Greece lacks the ability to contain its 12.7% fiscal deficit. This is true of other high-deficit Euro zone nations such as Portugal and Ireland too.
Credit default swaps on Greek debt—the cost of insurance against a default—soared 19.5 basis points to 446.5, on early trades, Bloomberg said. This means its costs $446,500 (Rs2.1 crore) to insure against a default of a notional $10 million of debt for five years.
“We don’t know banks’ exposure to this (the European situation),” said Andrew Holland, chief executive officer of equities at Ambit Holdings Pvt. Ltd, a Mumbai-based investment management and brokerage firm.
The dollar has been strengthening in recent weeks against all major currencies, no longer making it attractive for investors to borrow in the greenback and invest in riskier markets. On Friday, the dollar index rose to its highest in seven months, while the rupee plunged by 48 paise to 46.73 against the US currency.
Foreign institutional investors, the main driver of the markets, have started pulling out money from the country. In the past 10 days, they have withdrawn $1.5 billion from India. Overall this year, they have taken away $140 million after pumping $17 billion into Indian equities in 2009.
Emerging market equity funds lost $1.6 billion in weekly withdrawals, the biggest outflows in 24 weeks, EPFR Global said. Investors withdrew $516 million from Asian stocks outside of Japan, the research company said.
“The mood is bearish globally,” said Anoop Bhaskar, head of equity at UTI Asset Management Ltd, India’s fourth largest mutual fund with Rs74,500 crore assets under management in January. “Even if you are bullish about India, you would prefer to wait. Even domestically, fair valuation is what you want”
“Valuations were outside the comfort zone,” said Subramaniam of Religare.
The Sensex is trading at 15.09 times earnings for fiscal 2011. While this has come down from the highs of 20-21 times, it’s still above the long-term average of 14.5 times. Despite the near 11% fall in the Sensex from its recent peak, Indian stocks are still more expensive than that of China, Russia and Brazil.
“Risk aversion is leading to an outflow from all emerging markets, including India,” said Navneet Munot, chief investment officer of SBI Asset Management Ltd, a unit of the nation’s biggest bank. Investors are concerned that “growth, particularly in the developed world, will not be as robust as some people expect”.
Ashwin Ramarathinam of Mint and Rajhkumar K. Shaaw of Bloomberg contributed to this story.