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Business News/ Market / Stock-market-news/  What ails the Indian stock markets?
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What ails the Indian stock markets?

Almost half the Sensex stocks are trading lower than a year agoa closer look at this and other disquieting facts

Sensex has lost 5.3% in the eight trading sessions since RBI’s policy announcement. Photo: Premium
Sensex has lost 5.3% in the eight trading sessions since RBI’s policy announcement. Photo:

The threat of a weak monsoon and lingering doubts about an economic recovery this year have made investors nervous. With Thursday’s 2% fall, the Nifty fell below 8,000 for the first time in five months. In the last year, the BSE Sensex has returned 3.1%. Although that is a low enough number, it hides other disquieting facts.

Nearly half the constituents of the Sensex are trading at lower levels than a year ago. This malaise is not restricted to a few industries, but is spread across banking, packaged consumer goods, infrastructure, auto and oil. State Bank of India, Tata Motors Ltd, Tata Steel Ltd, Reliance Industries Ltd and Larsen and Toubro Ltd are a few examples of stocks that have been hit. Among the stocks that have yielded positive returns, a bunch of defensives such as pharma companies, HDFC group stocks and Hindustan Unilever Ltd dominate. They don’t exactly hold out the promise of great economic growth.

Analysts are busy paring their year-end targets for Indian stocks. UBS Securities India has revised its Nifty target for the end of this year to 8,600 from 9,200 earlier, citing the effects of a poor monsoon on inflation and growth.

Last week, CLSA cut its year-end Sensex target by 3% to 28,500, owing to a delayed growth pickup.

That said, there is not much optimism in the rest of the world’s economic outlook as well.

Is this fall in stocks peculiar to India?

Indeed, Thursday’s fall was unique to India but considering the last one year or even since the beginning of this calendar year, there are other markets which have fared worse. In dollar terms, Indian stocks have fallen 3.3% from a year ago, but have done better compared with say, stocks in Indonesia, Russia or Brazil, the last of which has seen stocks shed almost a third of their value. At the same time, China, which is floating in bubble territory, the US, Japan, the Philippines and Thailand have done much better.

Is the fall in Indian markets a reflection of investor disappointment with the lack of reforms?

Perhaps. Although the government has pushed ahead with some measures such as allowing greater foreign holding in insurance companies and introducing an auction system for coal blocks, there is a feeling that it hasn’t done enough. For example, investors were looking forward to things such as a single window clearance, which would have enabled a faster revival of stalled projects. In fact, consider this statistic: In the year up to 11 June 2014, the Sensex returned 33%, a lot of the credit for which goes to the Modi effect besides Raghuram Rajan taking charge as central bank governor. Thus, this year’s 3% return is also a reflection of the fact that the Modi magic has waned.

Is the fast-receding possibility of rate cuts this year a big problem?

Last week’s monetary policy seems to have precipitated matters: the Sensex has lost 5.3% in the eight trading sessions since the policy announcement. Bond markets, too, are jittery. That’s because we are seeing interest rates of 7.7% or so at the beginning of a recovery.

This is totally unlike the bull run that started from 2003 when the 10-year yield fell to around 5% by October that year. When interest rates are this high at the beginning of a recovery, there are questions whether they are low enough to fuel an investment surge.

A supplementary question would be whether this has affected the so-called rate-sensitive industries such as real estate and automobiles the most. As the chart shows, while realty firms were the worst off in the last year, the other poor performers are metals and oil. That is to be expected since the prices of these commodities have fallen sharply in global markets. Thus, producers of these raw materials have been the most affected.

Are the jitters confined only to equity and bond markets?

For the moment, yes. The rupee has depreciated by 7.4% in the past year, but is the best performer among the so-called Fragile Five currencies, thanks to portfolio inflows. India’s external vulnerability has come down, partly owing to a fall in commodity prices.

The current account deficit is down, last year’s foreign exchange reserves addition was the best in years at $61 billion and import cover is at nine months of these reserves. With US jobs data showing a rebound, a sooner-than-anticipated hike by the US Fed could pressure inflows and the consequently the currency.

Is the Fed rate hike the key factor that determines the outlook for Indian stocks?

It is only one among several. Corporate earnings aren’t going anywhere and downgrades continue, not least to factor in the weak monsoon.

India might still be the favoured market among foreign investors but valuations are pretty high at close to 16.5 times expected earnings for this financial year. Leveraged companies don’t have the wherewithal to raise further funds for investments.

To top it all, economic growth, as represented by the new gross domestic product numbers, is a big red herring. It is not reflected in corporate earnings, it is not seen in credit growth. Now, even markets don’t seem to believe it. To sum this up, consider another statistic: In the year up to 11 June 2013, in the midst of the previous United Progressive Alliance government’s policy paralysis and sluggish economic growth, the Sensex still returned 13.5%, far higher than the last one year’s return of 3.1%.

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Published: 12 Jun 2015, 12:13 AM IST
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