Are we in a bear market yet? Technically, a bear market is defined as a correction of more than 20%. By that measure, it may seem like a relief we are not yet in a bear market, since the Nifty 500 index has fallen about 10% from its high in early June. But as Raamdeo Agrawal, joint managing director at Motilal Oswal Financial Services Ltd says, “You don’t need to look at the index. If you have 500 companies at 52-week lows, and not even 5 companies at their highs, then there is no question this is a roaring bear market."
“The sharp slowdown in auto sales, NBFC stress and recent disappointment with the budget has turned the narrative pessimistic amongst investors. There are structural undertones of a lack of quality jobs, implying the consumption resilience seen until early 2018 is likely unsustainable," says Gautam Chhaochharia, analyst, UBS Securities India Pvt. Ltd. A higher proportion of Indian households are moving towards savings and investment vis-a-vis spending, he adds in a note to clients.
The depressing reality about this market also is that this correction could easily worsen. While the share prices have come down, valuations have hardly corrected. “Based on our top-down estimates, the Nifty is still trading at 19 times 12-month forward earnings," the UBS note says. This leaves room for further corrections.
To make things worse, the budget included market-unfriendly measures such as a tax on certain FPIs and the rich. “The government is displaying a lack of respect for the markets," said a mutual fund manager, requesting anonymity.
“Post the budget, the sentiment has worsened. Some of the latest measures, such as the surcharge on FPIs and ultra high net-worth individuals , are clearly demotivating the markets. Besides, the government is not giving an ear to the voices in the market," says Ambareesh Baliga, a markets expert.
Senior traders also say that the budget has disturbed the equilibrium of the market and FPIs are angry with the government’s recent moves. “India is not the only market for foreign investors. We have to compete with other emerging markets, and we need to create a level playing field," rues a veteran of the markets.
Some of the pessimism stems from the slow economic growth rate. Core IIP (Index of Industrial Production) data is quite surprising, said Suvodeep Rakshit, an economist at Kotak Institutional Equities. “I think the markets are taking into cognizance the extent of domestic growth slowdown and its impact on various sectors. Also, the tone and guidance of the US Federal Reserve was not as dovish as the markets were expecting," he said.
“The narrative (corporate commentary and investor discussions) and the fact that the slowdown is broadening to more segments suggest a negative feedback loop is developing in the economy. NBFC stress initially affected only a few select segments but is now showing up in more areas," says Chhaochharia. Growth of eight core sectors dropped 0.2% in June.
As a result of all this, foreign portfolio investors (FPIs) have pulled out nearly $2 billion from the equity market in July. In this backdrop, it isn’t surprising that traders and analysts are looking for to an adequate policy response from the government.