The Sensex is trading at 17.56 times FY2020 earnings (Photo: Mint)
The Sensex is trading at 17.56 times FY2020 earnings (Photo: Mint)

Growing economic worries leave markets in a bear hug

  • Fear that slump will be more prolonged than thought roils stocks; Rupee weakened 1.3% to 72.39 a dollar, a level last seen on 13 Nov, on concerns of further outflows from equities
  • Analysts say the economic slowdown will have an overall impact on corporate earnings

Mumbai: Indian stocks fell the most in nearly 11 months and the rupee weakened to the lowest level in more than nine months on Tuesday amid concerns that the nation’s economic slump will be deeper and more prolonged than earlier thought.

The benchmark BSE Sensex plunged 2.06%, the most since 11 October, to 36,562.91 points while the National Stock Exchange’s Nifty plunged 2.04% to 10,797.90 points. Metal, consumer durable, bank and telecom stocks were the worst hit.

The rupee weakened 1.3% to 72.39 a dollar, a level last seen on 13 November, as the slump in economic growth stoked concerns of further outflows from equity markets. The 10-year government bond yield also fell on rising bets for a deeper interest rate cut.

Gross domestic product growth slumped to a six-year low of 5% in the quarter ended 30 June from 5.8% in the preceding three months.

Growth in eight infrastructure industries that make up two-fifths of the index of industrial production (IIP) slowed to 2.1% in July, indicating that the country’s economic slump may deepen unless the government takes additional measures to reverse it.

Analysts said the sharp slowdown in economic expansion and weak core sector growth have prompted heavy selling by investors.

“The markets slid as deceleration in economic growth due to fall in consumption and subdued manufacturing activity diminished the scope for a turnaround in the near term," said Vinod Nair, head of research, Geojit Financial Services Ltd.

“Weak monthly auto sales and outflow from foreign investors added volatility to the rupee," he said.

(Graphic: Sarvesh Kumar Sharma/Mint)
(Graphic: Sarvesh Kumar Sharma/Mint)

The tariff war between the US and China and sluggishness in economies around the world have affected markets here as well as elsewhere, said Joseph Thomas, head of research, Emkay Wealth Management. “Weak domestic consumption—especially rural consumption—has resulted mainly from low employment levels and non-availability of finance, which are issues that call for immediate measures to salvage the situation."

Analysts said the economic slowdown will have an overall impact on corporate earnings. In an environment of elusive earnings recovery, valuations of Indian stocks will become more expensive, driving away investors.

Valuation-wise, Indian markets are the most expensive among their peers. At current levels, Sensex and Nifty are trading at 17.56 and 16.69 times fiscal year 2020 earnings, respectively.

One-year forward price to earnings of MSCI EM index is at 11.88 times and that of MSCI World is at 15.35 times.

A Mint analysis of 1,284 listed companies excluding banks, financials, and oil and gas companies showed that net profit fell by 5.23% for the three months ended 30 June from a year earlier. During the quarter, sales of these companies grew 4.6%, an eight-quarter low, slower than the 14.2% growth in the preceding three months.

The slowdown in growth, and that it was slower than even the most bearish estimate, is a cause for concern for investors, Nomura said.

“We expect continued strong policy actions by the government and dovish monetary policy measures to revive growth. Our investment strategy assumes a slow recovery in economic growth. Through the 1QFY20 earnings season, consensus earnings estimates have been cut sharply (Nifty earnings estimate for FY20 reduced by 7.5% since the start of FY20). A further cut of 3-4% is likely, in our view," Nomura said in a report on 3 September.

Ravindra Sonavane contributed to this story.