Stocks fall on China rate hike, Irish contagion fears

Stocks fall on China rate hike, Irish contagion fears

Mumbai: The euphoria seen last week during Diwali and the second round of quantitative easing by the US, which pushed the benchmark indices to closing highs, is long gone now.

Investors around the world exited risky assets on fears that China might raise rates this weekend to cool its overheated economy and the debt problems of Ireland and Portugal may lead to contagion.

The Bombay Stock Exchange’s bellwether gauge, the Sensex, dropped 2.1%, or 432.20 points, to close at 20,156.89 points on Friday. This is a loss of 4% from its all-time closing high of 21,004.96 it touched on Muhurat trading a week ago.

It is also the Sensex’s worst weekly fall since May, when the spectre of another European debt contagion—that of Greece—scared investors.

The broader 50-stock Nifty shed 1.98%, or 122.60 points, to end at 6,071.65 points.

The drops were only a fraction of the bloodbath in the Chinese market, where investors speculated authorities would hike rates for the second time in two months to curb a 25-month high of 4.4% inflation rate in October.

They hammered the Shanghai Composite Index 5.16% and the Shenzhen Composite 7%, spurring sell-offs across the world, including in Europe and the US.

Investors also fear that Ireland and Portugal, which are struggling with high borrowing costs, might default, leading to a debt contagion in Europe. Also, economic output numbers released on Friday for the area did not bring cheer for investors.

Some fund managers said a third factor could be that the meeting of the group of Twenty (G-20) heads of state in Korea has done little to allay fears of a prolonged currency war.

Still, with liquidity being the main factor driving Indian markets, most aren’t surprised by the drops.

“When you play on the carry trade and especially in an oversold market, one or two reasons are enough to spur this sell-off," said Gopal Agrawal, who helps manage Rs275 crore as head of equities at Mirae Asset Global Investments (India) Pvt. Ltd.

Carry trade refers to borrowing currency with a low interest rate (US dollars) to buy higher yielding assets such as emerging market equities.

“The valuations are also not cheap so these reasons become a case enough for reversal," Agrawal added.

The Sensex is currently trading at 19.16 times its estimated earnings for financial year 2011. This is higher than the 15 times long-term average of the price-to-earnings multiple.

“The affect on China was bound to be felt," said Nandkumar Surti, chief investment officer at JPMorgan Asset Management (India) Pvt. Ltd, which manages Rs8,448 crore.

Some analysts also indicated a purely local factor—unexpectedly lower factory output numbers for September. The Index of Industrial Production came out at 4.4% lower than the previous month’s 5.6%.

Many analysts brushed off this factor. “The underlying trend is reasonably strong and there is nothing wrong with India," said Surti.

Bloomberg and AP contributed to this story.