Photo: Bloomberg
Photo: Bloomberg

Don’t panic, say experts, as rupee, stocks fall

Analysts recommend going short on Indian stocks in the short term, staying long on them in the long term

Mumbai: On Tuesday, BSE’s benchmark Sensex fell 538.12 points to 26,781.44, the lowest since 27 October, and the rupee weakened to 63.54 to the dollar, a level last seen a year ago. The Sensex touched a low of 26,736.23 in intra-day trading and the rupee, 63.59. The Sensex has shed 7.1% since 28 November. Indian stocks joined the sell-off in global equities even as crude prices fell below $60 a barrel for the first time since 2009.

A short summation of expert recommendations would be to go short on Indian stocks in the short term, and stay long on them in the long term. Here’s a quick summary of what’s happening, why, and what to expect.

Why?

The rupee is weakening because of the country’s trade deficit for November (which came in on Monday), an 18-month low, and heavy dollar demand by foreign investors, who are liquidating their holdings in India.

The rupee’s fall, and the sharp fall in crude oil prices are responsible for what’s happening in stocks too.

“A major part of the problem is one of the currency depreciating, which is hurting the market, as foreign investors’ gains get reduced to that extent," said Deven Choksey, managing director and chief executive of K.R. Choksey Shares and Securities Pvt. Ltd.

Many of these foreign investors “have suffered mark-to-market losses in oil, which is leading to a sell-off in other asset classes", added Choksey.

Indeed, the average investment of foreign institutional investors (FIIs) in Indian shares per trading session in December dropped to $67.9 million from $128.9 million.

They were sellers in Indian debt as well as equities for the first time in two months on 15 December, according to data from Securities and Exchange Board of India (Sebi).

Is it just us?

No. Sliding oil prices and a downbeat China factory survey weighed on Asian shares on Tuesday, while the Russian rouble fell against the dollar after Russia sharply increased its benchmark interest rate in a bid to halt a collapse in its currency.

HSBC flash Purchasing Manager’s Index (PMI) for China dropped to a seven-month low renewing concerns about economic growth.

“The problem is that the oil-rich countries are suffering and the flows into the emerging markets pack are coming off," said S. Naren, chief investment officer at ICICI Prudential Asset Management Co.

What’s the forecast?

The near-term one isn’t good.

“Even as fundamentals of Indian companies are fine, this month is going to be a washout for markets," said Choksey.

Actually, the near term is complicated, explained Naren, because “India benefits in the long run from the drop in crude oil prices" but “the near-term outlook is clouded because of what is happening elsewhere in the world".

NSE’s India VIX Index, which indicates near-term market volatility, climbed 16.3% to 16.31 at the close, hinting at choppy times in days to come

The silver lining for India is that the situation is better on the domestic front and, while it is not insulated from global shocks, the damage could be relatively lesser.

“Situation in Russia is clearly affecting the mood elsewhere and because the year-end is approaching, nobody is willing to make big bets. India has been this year’s winner, so no wonder we see a bit of profit-taking there," said Hertta Alava, director of emerging market funds at Finland-based FIM Asset Management Ltd, which manages €460 million of emerging market assets.

“Fundamentally India is in relatively good shape and it benefits from the recent decline in the oil price. Inflation is under control, which creates room for interest rate cuts next year. Near term, it is possible that weakness continues, but outlook for next year should be quite good," Alava said in an e-mail from Helsinki.

Targets?

Macquarie Capital Securities India Pvt. Ltd, the Indian arm of Australia’s Macquarie Group, said on 2 December that its 12-month Nifty target was 9,940, based on 15 times FY17’s earnings per share estimates.

“Despite the outperformance relative to global markets, the Indian market is still below previous valuation peaks. We believe the market can re-rate further to 16-17 times if economic recovery is stronger than expected," Macquarie analysts said in the note.

In a 28 November note, Citigroup raised its December 2015 target for Sensex by 16% to 33,000 points and set the target for Nifty at 9,850 points.

“We expect 2015 to be a good year," Citigroup analysts Aditya Narain and Jitender Tokas said in the note.

Bank of America Merrill Lynch expects rupee to be at 62 per dollar by March, and other currency dealers also share the same outlook and attribute the fall in rupee to year-end pressure by FIIs.

“Rupee should be able to scale back once the year is over. Chances of rupee hitting 65 is less, even as it may rise to 64 level. If the US Fed does not unexpectedly hike interest rates, by March everything should be normal and rupee should strengthen to 62 level," said Samir Lodha of QuantArt Market Solutions, a currency risk management firm.

Reuters contributed to this story.

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