Indian stocks joined a global sell-off on Monday as heightened trade tensions between the US and China, the word’s largest economies, risk derailing global growth.
It took just two tweets from President Donald Trump on Sunday to roil markets around the world. In two early morning tweets, he threatened to impose new tariffs on China. The tweets jolted investors who were expecting the US and China to resolve trade tensions.
On Monday, it sparked a sell-off in risk assets across the world. BSE’s benchmark Sensex fell 362.92 points, or 0.93%, to 38,600.34, while the National Stock Exchange’s Nifty index shed 0.97% to 11,598.25.
China, expectedly, was the worst affected. The Shanghai Composite index plunged 5.58%. Stocks in Hong Kong, Germany and France were down between 1% and 3%. The trade war has already led to billions of dollars of losses for both sides, while inflicting collateral damage on export-reliant economies and companies from Japan to Germany.
In his tweets, Trump said that trade talks with China were proceeding “too slowly" and that he would raise tariffs on $200 billion of Chinese goods to 25% on Friday from 10%. Trump also said he would target a further $325 billion of Chinese goods with 25% tariffs “shortly".
The weakness in Indian markets was in line with other global markets, said Ajay Bodke, chief executive and chief portfolio manager at brokerage firm Prabhudas Lilladher Pvt. Ltd. However, he said, India might be not impacted much by the trade war between US and China as domestic consumption accounts for 65-70% of overall gross domestic product, while only 15% is from net exports.
“Our focus should be on global crude, which has cooled off significantly. If crude prices continue to slip that will soften the blow of weakness in global markets and provide cushion to Indian equities," he added.
Crude oil prices have fallen 5% since 25 April, hovering around $70.60 a barrel after it crossed $75 in mid-April. Year to date, crude oil has gained 31.2%. India imports more than 80% of its oil requirement and sharp increases in oil prices weaken its currency, stoke inflation and lead to fiscal slippages.
However, a slowdown in consumption demand, clearly indicated by March quarter corporate earnings, suggest that the economic environment is likely to be challenging. “The weak volume growth reported by consumer staple companies in the fourth quarter of FY19 underlines the slowdown seen in housing over the past 5-6 years and automobiles over the past year. The next (possibly same) government may have its task cut out to revive flagging economic growth," said Kotak Institutional Equities in a report on 4 May.
Investors focusing on Indian assets are also keeping an eye on the ongoing national elections and the overall quality of quarterly earnings. Aggregate net profit growth of 124 BSE-listed companies that reported March quarter earnings fell 8.42% year-on-year, after adjusting for one-time gains or losses, according to data provider Capitaline. Profit grew 7.54% in the preceding three months.
Analysts at Kotak said the priority of the next government should be to revive economic growth although macroeconomic conditions were not very favourable as India’s high and persistent fiscal deficit, faltering tax revenues and broken business models in agriculture and infrastructure ruled out further fiscal stimulus.
However, foreign institutional investors (FIIs) have remained bullish on India. They have bought Indian equities worth $9.85 billion so far this year, while domestic institutional investors including mutual funds and insurance companies are net sellers of ₹17,303.35 crore in 2019.
The performance of Indian markets has lagged behind that of global peers this year so far.
In 2019, the Sensex has jumped 7%, while the MSCI World and MSCI Emerging Markets indices gained 12-15%.
The MSCI Emerging Markets Index captures large and mid-cap representation across 24 emerging market countries, while the MSCI World is a market cap weighted stock market index of 1,649 stocks from companies throughout the world.
Reuters contributed to this story.