Sensex falls 1.5%, wipes out gains so far this year

Brokerages lower year-end targets for Sensex; rupee hits a fresh nine-month low

Banking, metal and realty stocks closed lower on Monday. Photo: Hindustan Times
Banking, metal and realty stocks closed lower on Monday. Photo: Hindustan Times

Mumbai: India’s benchmark indices, the Sensex and Nifty, on Monday erased all their gains so far this year and the rupee closed at a fresh nine-month low as foreign institutional investors find dollar assets more attractive.

Brokerages have started cutting their year-end targets for the Sensex while currency strategists are predicting a weakening of the rupee.

Foreign institutional investors have pulled out a combined $3 billion from local equity and bond markets since the US election that saw the emergence of republican Donald Trump as the president-elect. Trump, who had said he would tax imports from China, is expected to choose an expansionary fiscal policy in the world’s largest economy.

“In case the pressure on outflows from China increases as a consequence of US Fed policy and president-elect Trump’s pro-growth policies, which would result in sharp dollar strengthening, we may see acceleration in the selling by foreign institutional investors,” said a 19 November note from Deutsche Bank AG.

The bank’s equity strategists have pared their end-December target for the Sensex by 7.4% to 25,000.

On Monday, the Sensex shed 385.1 points, or 1.47%, to close at 25,765.14. Year to date, it has declined 1.35% while the 50-share Nifty has shed 0.22%.

Deutsche Bank is not the only brokerage to cut its stock outlook. In a 10 November note, Bank of America-Merrill Lynch called the government’s move to withdraw high-value currency notes as a second “black swan” to hit Indian markets, the other being the Republican sweep in the US elections. The brokerage has cut its December-end Sensex target by 5% to 26,000, also because of the renewed focus on US Fed actions in December.

Last week, US Fed chair Janet Yellen said an interest rate hike could come “relatively soon”. Further to that, Trump’s likely expansionary policies will also push up inflation, making the case for rate hikes. In the last 30 days, US 10-year treasury yields have climbed 49 basis points to 2.31%. Simultaneously, the dollar index, a measure of the greenback against six major currencies, surged 2.3% to 100.97, prompting a withdrawal from emerging market assets.

That, combined with the demonetisation locally, have ensured that one-month returns of the Sensex and Nifty are among the worst in the world.

Demonetisation may have a medium-term impact on earnings (bad now, better later) and will be seen in periodic company reporting, BofA ML said. The impact of the US elections, through valuations in general and through specific earnings implications for the pharma and IT industry will take time to play out, the brokerage added.

Deutsche Bank also said demonetisation will lead to medium-term demand contraction and has pared its Sensex earnings estimate by 1%, though it estimated earnings for some consumer discretionary firms to fall by as much as 24% from earlier forecasts.

Rising US yields and an outflow of dollars have also weakened the rupee to a nine-month low. The local currency closed at 68.17 a dollar, a level last seen on 29 February, down 0.04% from its previous close.

“While we expect imports of consumer goods to fall, we find that this could be easily offset by higher gold demand,” said HSBC Global Research in a 16 November note.

“Our FX (foreign exchange) strategists see the rupee weakening to 68.0 by end-2016 and 69.5 by end-2017. All told, the short run is indeed a mixed bag. Longer-term gains depend on follow-up reforms.”

The year-end median forecast for the rupee is now 67.5 per dollar from 67 at the beginning of this month, data from Bloomberg showed.

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