Markets skid as US Fed taper talk leaves investors worried

Mumbai: Indian stock market indices fell nearly 1% on Friday, tracking weakness in global markets, after the minutes of the US Federal Reserve’s July meeting showed that it may consider raising interest rates soon. The fast-spreading delta strain of the coronavirus also stoked fear among investors about economic growth.

The BSE Sensex fell 300.17 points, or 0.54% to close the day at 55,329.32. The Nifty slipped 118.35 points or 0.71% to end at 16,450.50. Markets in Asia-Pacific plunged with Hong Kong’s Hang Seng index falling 1.84%, while the Shanghai composite in China, Japan’s Nikkei, and South Korea’s Kospi slipped nearly 1%.

“Global markets witnessed volatility as the Federal Open Market Committee (FOMC) meeting minutes suggested the increase of the likelihood of tapering of asset purchases in 2021. Investors also remained cautious around concerns relating to the delta variant of covid,” said Shrikant Chouhan, equity technical research at Kotak Securities Ltd.

The India volatility index or India VIX spiked 8.6% to end at 14.02. The rise in the fear index indicates that anxiety and nervousness among investors have increased significantly.

Investors are increasingly getting worried about India’s market rally. Christopher Wood, global head of equity strategy, Jefferies said that sooner-than-expected rate taper by Fed may cause some jitters in the risk-on trade in equities, and give a reason for treasury bond yields to move higher. “The easy money stance has clearly been one key driver of the rally, as in America, which is why India is likely to underperform in any global risk-off move triggered by tapering scares,” Wood said in his note, Greed and Fear. However, Jefferies increased the weightage on India by two percentage points with the money shaved from China and Hong Kong. Wood remains structurally positive on the Indian markets despite the lofty valuation at 21.5 times 12-month forward earnings, which creates a “certain vertigo”.

BofA Securities analysts have issued warnings on Indian equities fearing a correction of markets in the near-term. “Our analysis of past market rallies suggests the current rally could have limited further runway. We see risk of estimate cuts and with valuations at a peak we expect markets to correct 9% in the near term with our Nifty target at 15,000,” said BofA Securities in a note on 20 August.

So far in August, India has outperformed emerging market peers as global equities succumbed to selling pressures. However, benchmark indices Sensex and Nifty have slipped about 1% from their respective record highs.

According to US-based brokerage firm Morgan Stanley, most investors are cautious about the growth outlook for Asia, given the frequent interruptions from tightening restrictions across regions in response to a rise in new covid-19 cases.

“We acknowledge that this remains a near-term headwind, but we see vaccinations ramping up, unlocking a full-fledged recovery from early next year and swinging the Asia-US growth differentials back in Asia’s favour from March-April 2022,” Morgan Stanley said in a note on 18 August.

However, Morgan Stanley feels that Fed’s expected tapering announcement in December 2021 and start to the rate hike cycle from Q2 2023 does not necessarily raise pressures that central banks in Asia have to normalize ahead of the Fed.

Loose monetary policy by global central banks have led to massive liquidity inflow into equities following the covid-19 outbreak. In August so far, foreign institutional investors or FIIs have purchased Indian shares worth $870.19 million after draining out $1.70 billion in previous month.

Domestic institutional investors (DIIs) continued to invest in shares. DIIs net inflows in August stood at ₹2,305.86 crore after clocking ₹18,393.92 crore the previous month in July.