Last Friday’s mayhem in the Indian equity markets was, for a change, a purely domestic affair, completely at variance with buoyant trends elsewhere. Indeed, last week, the much-maligned Argentine peso went up almost 7%, while other beleaguered currencies such as the Brazilian real gained 3.1% and the South African rand moved up 4.3%. Brazil’s Bovespa equities index rallied 5.3% and Turkish stocks 3.4%. The Shanghai Composite Index also went up 4.3%.
In short, the mood seems to be changing in the international markets. The Bank of America-Merrill Lynch (BofA-ML) survey of fund managers for September found that allocation to emerging markets (EMs) had slumped to a net 10% underweight, the lowest since March 2016. Shorting EM equity was one of the most crowded trades. However, a net 43% of investors believed that EM currencies were undervalued and the cheapest since 2013. The BofA-ML fund manager survey is usually taken as a contrarian indicator and the big short on EM assets coupled with high levels of cash increases the chances of a reversal.
Indeed, fund flow tracker EPFR Global pointed out that some EM equity country funds, such as those for China and South Africa, had started getting inflows. But what about India? Says EPFR Global, “While India is often viewed as a haven when emerging markets come under pressure, thanks to its domestically oriented economy and relative lack of exposure to global trade, weekly flows to India Equity Funds have faltered in recent weeks. The latest outflow was the fifth in a row. Despite India’s impressive gross domestic product growth, the patchy, unevenly distributed and below average monsoon rains have increased the risk that food prices will boost inflation—and, in time, interest rates—as have the rising import bills for US dollar denominated crude oil."
On Friday, while the Indian benchmark indices recovered, the National Stock Exchange’s (NSE’s) volatility index (India VIX), or the fear gauge, which has been remarkably complacent despite macro concerns, spiked to nearly 17 during the day. This is the highest intraday surge seen in the volatility index since February this year. Market breadth was pathetic and has been so for some time as seen in the chart.
Analysts point out the market has for long shrugged off macro-economic concerns and continues to trade at rich valuations; so, it was anyway ripe for a correction. One market analyst, who did not want to be named, said that a slew of arbitrage funds bought in the derivatives segment and sold in cash, which could have accelerated the fall.
Meanwhile, domestic institutional investors bought Indian equities to the tune of a net ₹ 497 crore in the cash market on Friday. Provisional NSE data showed foreign institutional investors were net buyers as well. Further, delivery volumes of BSE and NSE combined spiked to 36.85%, indicating that some investors may have used this correction to accumulate and build positions.
Nevertheless, while the international markets turned favourable last week, the fact remains that US 10-year Treasury yields have gone above 3%. Crude oil prices remain high and the trade war between the US and China continues to escalate. At home, everything depends on how soon the crisis of confidence arising out of the IL&FS defaults is resolved.