Bloodbath On Dalal Street

In the past few days, Dalal Street has been nothing less than a war zone. Stocks have been beaten down, the market has fallen constantly and there is a lot of pressure on the indices. Though the Sensex recovered on Thursday and closed with a 330-point gain, the bloodbath may continue in the immediate future as stocks correct their exalted positions.

On February 6, a Tuesday, the bloodbath was particularly severe—the Sensex dropped to an intraday low of 33,483, and finished the day at 1.6 per cent or 561 points low at 34,196.94. Much the same way, the NSE Nifty dropped from its earlier level to 10,276, but recovered to close at 10,498 points, a good 168 points or 1.6 per cent lower than its previous close. This was the biggest intraday fall for both the indices since November 2016. As a result of the fall, almost Rs 9.5 lakh crore worth of investor money was wiped out in just three days.

Most experts feel the massive decline in the markets was triggered by the downturn in equities in the US, coupled with rising bond yields. The global market tanked heavily on this and the S&P 500 index fell by six per cent. The repercussions showed in other world markets with FTSE, Hong Kong and Japan’s Nikkei falling steeply. “The main cause of the big crash is the fall in the global markets leading the FIIs (foreign institutional investors) to pull out quite a bit of money from the Indian market,” says Deepak Shenoy, stock market expert and founder of Capital Mind. “As long as the world markets are weak, there will be an impact on the Indian stock markets.” As if on cue, immediately after the market crash of Monday in the US, Indian markets tanked on Tuesday.

Another factor contributing to negative market sentiments is the rather muted performance by the Indian corporate sector in the last eight quarters, which many attribute to policy changes and developments such as higher oil prices and implementation of GST.

Tuesday’s downward rally was particularly severe considering that the Sensex tanked by over 1,200 points in early trade before seeing some recovery. This meltdown, say experts, was due to the fall in global markets and equities. Dow Jones fell by over 1,100 points on Monday—its biggest fall in over six years. This was caused by announcement of US wage data that signalled a firming up of inflation, which was expected to push the US Fed to increase interest rates. And if the cost of capital goes up, realignment happens.

“The market nervousness is due to global factors,” says Deven R. Choksey, managing dir­ector of K.R. Choksey Shares & Securities. “The slump has followed the shifting of global funds from equity to debt because of the bond yield rising in the global market. The trend started over the past few months. The sell-off by the global fund accelerated last week, triggering the slump. The fall has nothing to do with the Union Budget as the funds have bought post-Budget also.”

According to RBI governor Urjit Patel, the firming of bond yields was because of changes abroad in central banks, particularly the US Fed, and other fiscal developments in the US. Over the past six weeks in the US, 10-year bond returns have hardened by 40-50 basis points. On the domestic front, Patel told the media that there are competing demands on financial capital due to uptake in economic growth, putting pressure on all returns. On the fiscal side, there was news on slippages at three levels: slippage this year; slippage next year, compared to what the market expected; and a postponement of medium-term adjustment even further, which makes it clear which way the bond rates will move.

According to Choksey, as long as the bond yield moves in a calibrated manner, the fall in the equity market remains restricted. It is only when the bond yield rises sharply that there is an accelerated fall in the equity market, given that the bond yields are not likely to rise in one go. He feels shifting out of funds from equity will not happen in a hurry, but that will be the trend going forward.

Moreover, the outlook for the US has improved considerably with its GDP registering 3.5 per cent growth, the highest in the past 10 years, resulting in the possibility of rising inflation and bond yield.

The markets were already under pressure after populist measures were announced in the Budget. But the proposal to reintroduce long-term capital gains tax of 10 per cent on gains above Rs 1 lakh has had a particularly significant impact on the markets. In fact, immediately after the Budget announcement on February 1, the markets reacted negatively and the benchmark BSE Sensex closed 58.36 points lower than its previous day’s close at 35,906.66 after losing about 400 points in intraday rallies. The NSE Nifty also closed 10.80 points lower than its previous close at 11,016.90. The downward slide has continued.

Moreover, in the past few days the market had been extremely cautious in anticipation of an increase in the bank repo rate by the RBI to address inflationary concerns. Although the RBI kept the repo rate unchanged, the market continued to fall. After the RBI monetary policy announcement, the Sensex closed 113 points down and the NSE Nifty was down by 22 points.

Many experts believe the current crash is actually a long overdue correction. “The Indian market was overheated and a large number of investors were pouring money in mutual funds when there was a lack of earnings growth. This was creating a mismatch,” says Dhirendra Kumar, CEO, Value Research. “Valuation in the market was stressed. Indian multicap funds are up 20 per cent even though the one-week return of the Sensex was down by five per cent.”

Another factor, says Kumar, has been the behaviour of the FIIs. Roughly 16 per cent of the investible stock universe in India is owned by FIIs and a large part of our big companies are also owned by them. That brings the volatility in the market. On Monday alone, FIIs had pulled out over Rs 1,200 crore from the market. “When there is panic, there is a herd mentality and all FIIs pull out money from a market,” says Kumar. “That is what happened here and affected the large caps that constitute the Sensex. And this FII behaviour is in anticipation of the fallout on interest rates in the US.”

A lot will depend on how companies perform in the coming quarters. “The whole weight of the market will now fall on corporate earnings,” says Devendra Nevgi, founder of Delta Global Partners. “So far the PE (price-earning) ratio expansion was driven by global factors and domestic flows into the market. It is important that the corporate earnings catch up and domestic flows do not disappoint.”

So what is the outlook for the coming days? Shenoy feels this hammering in the markets is expected to continue for some time as large caps are yet to correct and come to a logical valuation, although small and mid caps have corrected to some extent.

But Kumar feels that while the market will go nowhere in the short term, prospects are pretty good in the long term. “I am extremely optimistic for the market in the next three to five years, through which the Sensex should double investors’ money. In five years, the Sensex should hit 75,000. This is because there will be more liquidity in the market thanks to the massive bank capitalisation by the government. Because of this, businesses will have access to more capital and perform well. Apart from this, GST will organise businesses and there will be consolidation.”

For the time being, though, the markets will remain subdued and a 10-15 per cent decline is not ruled out, driven primarily by the FIIs. But the long-term outlook for FIIs in India is compelling—they are expected to be back and push the markets to new heights. That optimism will keep investors alive.