BackInvestors exit, pursued by bear
Analysts say India's fundamentals strong but stocks, rupee could fall further in keeping with the global trend
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Mumbai: Indian equities are just a whisker away from bear market territory, with the BSE’s benchmark Sensex closing Wednesday’s trading 19.86% down from its last peak on 4 March 2015.
A market is said to be in bear territory if its benchmark index declines 20% or more over a period of time.
The Indian stock market’s ursine turn is in keeping with the global trend in 2016. China’s stock market entered bear territory on 15 January; Japan’s followed on Wednesday; and on Monday evening India time, in intra-day trading, the London Stock Exchange’s FTSE 500 entered a bear market.
Analysts say Indian stocks as well as the rupee could fall further, although they are at pains to point out that, fundamentally, there is nothing wrong with the India story that is contributing to this.
In intra-day trading on Wednesday, the Sensex did enter a bear market, and was trading at 20.6% off its peak before it recovered marginally.
The sell-off on Indian and global bourses on Wednesday was a result of investors remaining on a risk-averse mode. Stocks, currencies and commodities in markets stretching from Asia to Europe and the US took the resultant hit.
The drop was led by oil prices falling below $28 per barrel, a 12-year low.
Investors are reducing risk in their portfolios and gravitating towards safe-haven investments such as US treasuries.
In response, Japan’s Nikkei fell 3.7%, Hong Kong’s Hang Seng retreated 3.8% and China’s Shanghai Composite dropped 1%. In India, the BSE Sensex lost another 1.7%, or 418 points, to close at 24,062 while the National Stock Exchange’s 50-share Nifty fell 126 points, or 1.7%, and ended Wednesday at 7,309 points.
The rupee fell 0.48% to close at 67.96 per dollar, its lowest close since 4 September 2013.
In intra-day trading, the rupee came within striking distance of the all-time low of 68.85 per dollar it hit on 28 August 2013 and fell to a low of 68.17 per dollar.
The currency recovered towards the end of the session after state-owned banks were seen selling dollars around 68.10 per dollar levels both in the spot and derivatives market, possibly at the behest of the Reserve Bank of India (RBI), two currency dealers said on condition of anonymity.
What’s in store for Indian stocks?
Nothing good in the short-term, say analysts.
“The selling pressure is coming from foreign portfolio investors (FPIs). It is important to realize that this selling is happening at broader emerging market (EM) as well as global level, and India is getting impacted as a result of this broader risk aversion," said Abhinav Khanna, head of equities for Citi India, in response to an emailed query from Mint.
FPIs have sold $1.24 billion in domestic equities since the start of January and sales in the current fiscal have now added up to $3.8 billion—the largest outflow seen since fiscal 2009. Some of this selling is India-specific while a part of it is also due to outflows from emerging market funds.
According to data from the Institute of International Finance, emerging market funds saw six consecutive months of outflows till December. Outflows in December were at $3.1 billion. Since a considerable amount of money flows into the Indian markets via emerging market funds, outflows from such funds hit us as well.
“While flows cannot be predicted, the prevailing negative sentiment across risk assets does indicate that the trend of foreign selling may not reverse immediately," said Khanna, adding that there are some early indicators suggesting that domestic inflows into the equity markets are also slowing.
“On the domestic front, published data for December and our conversations with CIOs (chief investment officers) indicate that inflows into equity funds slowed down in December as against steady inflows that were witnessed earlier on in 2015," Khanna added.
According to data from the Association of Mutual Funds in India (Amfi), equity funds saw net inflows of ₹ 3,644 crore in December, which was about the half the average monthly inflows seen during the January-November period.
Sectors and stocks that have global interlinkages or foreign investor holdings are seen as most vulnerable if the current global environment persists. Sectors perceived to be high-risk and those where the domestic demand conditions remain weak have also corrected sharply.
Since the peak of the markets in March 2015, the BSE metal index has fallen 37%, while the BSE real estate and BSE capital goods indices have fallen 35% and 33% respectively. The BSE Bankex has fallen 25% since March 2015.
Among individual stocks, the top five losers are from the commodity and banking sectors. Vedanta Ltd has fallen 69% since 4 March, Jindal Steel and Power Ltd 68% and Hindalco Industries Ltd has fallen 55%. Among banks, Bank of India has fallen 59% and Canara Bank is down 57%.
On Wednesday, all but three of the Sensex stocks closed lower. Adani Ports and Special Economic Zone Ltd fell 5.5% to close at ₹ 219.55 per share, while shares of State Bank of India fell 5.13% to ₹ 173.70 apiece.
According to Deven Choksey, group managing director, KR Choksey Investment Managers Pvt. Ltd, the growing correlation between the commodity and the currency market could speed up foreign investor selling in the equity markets.
“The unfortunate part is that the crude price fall is escalating the fall in currencies. The fall in the rupee is also accelerating and that means FPI portfolios will incur losses. What you are seeing is that foreign investors will try to exit pre-empting that fall and that is adding to the sell-triggers in the market," said Choksey.
If RBI steps in to support the rupee, the equity markets will be reassured, he added.
“Let me say in one line—there is nothing fundamental about this fall. Fundamentals are improving," said Choksey.
According to an update to the World Economic Outlook released by the International Monetary Fund (IMF) on Tuesday, the Indian economy will grow 7.5% in 2016. In contrast, China is expected to grow 6.3% this year.
The Chinese economy is already growing at its slowest pace in 25 years, according to data released on Tuesday.
What’s in store for the rupee?
Nothing good in the short-term, analysts say.
Notwithstanding strong macroeconomic fundamentals of India compared with its peers, the pullout of FPIs from emerging markets coupled with a possible further devaluation of the Chinese yuan could drag down the rupee to all-time lows. In fact, some analysts predict that the rupee will fall to as low as 70 per dollar.
Bloomberg’s compilation of forecasts for the rupee shows that while forecasters differ in their expectation over the timing, Barclays Plc., UBS AG, Morgan Stanley and Royal Bank of Scotland Plc. all expect the rupee to hit 70 per dollar in calendar year 2016.
On Wednesday, Kotak Mahindra Bank lowered its forecast for the rupee to 70-72 per dollar for fiscal 2017 from its earlier expectation of 69 per dollar.
“The fundamentals of INR remain relatively strong as compared to other EMs. But when EM FX as a basket is weakening, it is imprudent to expect the INR to be resilient," said Kotak Mahindra Bank.
“In an EM complex that is dominated by export-oriented and commodity-linked economies, a slow and steady CNY (Chinese Yuan) depreciation is likely to trigger successive rounds of competitive devaluation," the bank added.
Since the start of January, the Indian rupee has fallen 2.7% while the Chinese yuan has fallen 1.3%. Since 10 August, when China first started to peg down its currency, the yuan has fallen 5.6%. Over this period, the rupee has fallen 6%.
A fall in the rupee may actually help in curbing the free-fall in exports, which have declined for 13 months in a row.
“I think a fall of the rupee would be good for the economy in terms of competing with other exporters, bringing down the trade deficit and creating domestic jobs, which is something the real economy needs," said A.V. Rajwade, an independent expert on foreign exchange and risk management.
China’s devaluation of the yuan poses twin threats to India’s trade by making Indian exports less competitive in the global markets and simultaneously making Chinese imports to India cheaper.
“The exchange rate remains a very important factor in export competitiveness. Also, it is not just for exports, but what is being overlooked is the question of competing in the domestic market with imports. For instance, the import of Chinese steel has gone up so much," said Rajwade.
Despite the recent fall, the rupee actually remains overvalued, going by the 36-country real effective exchange rate index, which measures the rupee’s competitiveness against trade partners. This index is currently at 112.56. Theoretically, a level of 100 or a little above that is seen as fairly valued.
Given this, analysts feel that RBI would intervene only to slow the rupee’s fall rather than protect a level for the currency.
“Given that the weakness is across all major EM currencies, the RBI would likely stay away from any heavy intervention to prop up the Rupee," Kotak Mahindra Bank said in its note.
This was evident on Wednesday. “Intervention perceived to be on behalf of RBI was seen around 68-68.10 levels but it was mild," said one of the traders quoted above.
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