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Global concerns, polls weigh on market

To top these concerns, crude and rupee are not in very comfortable zones.

, ET Bureau|
May 13, 2019, 08.07 AM IST
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Active fund managers tend to be stock pickers rather than index buyers.
Mumbai: The renewed strength in Indian markets that began on the higher likelihood of the Narendra Modi-led coalition winning the general elections has run into rough weather.

While investors reassess various outcomes in the ever-changing political setting, they have begun raising questions on whether the premium for Indian equities is justified amid the economic slowdown, elusive corporate earnings growth, crude oil surge and escalating US-China trade tensions.

The uncertainty over the election results is palpable with benchmark indices extending declines to the eighth consecutive session on Friday, logging its worst losing streak since February.

Analysts said traders are locking in profits from the gains made since March 1 — when the market rebound began partly in anticipation of Modi returning to power.

Foreign funds pumped Rs 54,000 crore since March, which is 78 per cent of the total inflows of Rs 69,000 crore since January. Their interest is petering out. Foreigners have sold Rs 2,500 crore in the last three days.

Triggered by renewed tensions between US and China over trade talks, the Sensex and Nifty have lost 4 per cent in its weak run over the last eight sessions and market cap of all companies listed on the BSE has eroded by nearly Rs 6 lakh crore.

“US-China tariff war has led to correction in almost every market across the world,” said Rajat Rajgarhia, CEO at Motilal Oswal Institutional Equities.Wall Street suffered its worst week of 2019 on Friday after the US on Friday hiked tariffs on Chinese goods worth over $200 billion, heightening worries that China could take counter measures against the American move.

“If China devalues its currency, then it becomes a risk for India as well because Chinese exports become cheaper and it would reduce attractiveness of Indian exports,” said Shiv Diwan, co-head, institutional equities at Edelweiss.

To top these concerns, crude and rupee are not in very comfortable zones. “At 70 dollars, it is not comforting, and if it were to inch up any further with Iran sanctions, there would be further impact,” said Diwan. Every $10 per barrel rise in crude oil prices expands India’s current account deficit by 0.4 per cent of GDP, according to analysts. Crude oil prices have gained over 30 per cent in 2019.

Politics and economics

From the lows hit on February 19, Sensex and Nifty gained 12 per cent till April 18 when markets made their all-time highs after the air strikes against Pakistan on February 26 in response to the Pulwama terror attacks were perceived as improving the BJP’s political prospects.

The Sensex and Nifty scaled record highs at 39,487.45 and 11,856.15 respectively.Amid the geopolitical tensions, the unofficial betting market or ‘Satta Bazaar’ raised the wager on BJP’s seat count to 250-260 from 220-230. But, this has slid to 220-230 due to the economic slowdown, led by the stress in rural India.

Benchmark indices have retreated 5 per cent from record highs. “Maybe people are also worried about outcome of the election because the satta market seems to be suggesting that outcome may not be in line with what the pre-poll surveys were suggesting,” said Sanjeev Prasad, cohead, Kotak Institutional Equities.

The fourth quarter corporate results of consumer companies have sparked concerns that the slowdown might be deep-rooted. “Earnings from some of the domestic sectors particularly consumer and autos have been quite disappointing,” said Rajgarhia.

If the economy is slowing, analysts are asking if the current valuations at 18.5 times one-year forward earnings — which is way higher than most emerging markets — justified.

Due to these concerns, a stable government may not be enough for markets to extend their strength for long after the results, said analysts.

“With the same government there could be a 5 per cent rally. That said, after 2-3 months, people will have to re-evaluate if structural reforms can be implemented to put India on to a higher growth trajectory,” said Prasad. “If we don’t have a stable government, there would be a 5-7 per cent correction, especially given the uncertain global environment and domestic economic slowdown,” he said.

Diwan of Edelweiss doesn’t see a runaway rally even if market expectations of a stable government are met as valuations and other macro concerns persist. “Sector rotation into capital goods, infra and cement is likely from other sectors,” said Diwan.

A big concern is how the government and Reserve Bank of India will deal with the deepening stress in the debt market and the liquidity crisis. Unless this problem is resolved, an economic reversal looks unlikely, said analysts. “Tight liquidity and leverage issues are still affecting markets,” said Rajgarhia.

After elections, the stock market gains are unlikely to be broad-based with inflows from global exchange-traded funds slowing.

“Huge passive money that has come into Indian markets this year could slow down irrespective of the election outcome, but active fund managers, both foreign and domestic, who have been fence-sitting this entire pre-election period, could support the Indian markets if there is a stable government,” said Ayon Mukhopadhyay, director-UK and Europe at IIFL Institutional Equities.

Active fund managers tend to be stock pickers rather than index buyers so it is possible that the index may not go much higher, but stock-specific buying could be there, he said.

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