Monday, May 23, 2022

Why Sensex Crashed By 4,036.18 Points In November Despite Positive Start

BSE and NSE's Friday performance implied that the indices have fallen 6 times in the last 8 days of trade. Concerns about the new coronavirus variant and Fed outcome dominated investor sentiments.

Why Sensex Crashed By 4,036.18 Points In November Despite Positive Start

On Friday, BSE Sensex fell 1,687 points or 2.87 per cent to close at 57,107.15, NSE Nifty declined 509.80 points or 2.91 per cent to close at 17,026.45. Friday’s performance implied that the benchmark indices have fallen in six sessions in the past eight days. This was also the worst single-day drop on the BSE in about seven months.

On Friday, the World Health Organisation (W.H.O), labelling it as a variant of concern, named it ‘Omicron’.  Fears about this variant which until then was going with the scientific name, B.1.1.529, was responsible for the resurgence of a COVID-related panic among investors. The global panic triggered due to the new variant was accompanied by fears about U.S. Fed Reserve’s decision on tapering.

New coronavirus variant created anxiety globally

The mood was also visible in markets across the Atlantic on Thanksgiving-day trade. The Dow Jones Industrial dropped about 905 points or 2.5 per cent for its worst day of the year. The S&P 500 and Nasdaq Composite too fell 2.3 per cent and 2.2 per cent respectively. Things were gloomy in Europe too as the pan-European Stoxx 600 index fell 3.7 per cent on Friday. Nikkei in Japan slipped 2.53 per cent to close at 28,751.62.

November not an impressive month for bourses

Fears about the newer strain of the virus are accompanied by the unimpressive performance of indices in the past month. BSE Sensex has fallen 6.60 per cent and shed 4,036.18 points in the last thirty days. However, November had begun on a high note. The Sensex had closed at 60,318 points on November 1 which was 832.46 points or 1.4 per cent higher over the previous close. Until November 26, Sensex and Nifty have closed higher on seven trading days and lower on eleven trading days.

U.S. Fed’s Tapering and Impact Back Home

On November 10, the U.S. Labour Department announced the consumer prices have risen at their fastest pace since 1990. The country’s consumer price index rose 6.2 per cent on a year-over-year basis in October. In their October policy meeting, the Fed had stated that they would not hesitate to respond to inflation. Investors feared the Fed might resort to tapering sooner than expected.

As part of its response to post-pandemic recovery, the Fed was buying $120 billion worth of securities each month in order to ease the flow of credit to households and businesses. In simpler terms, Fed was handing over cash to banks and enhancing its supply in the economy. Investors worried that the Fed might withdraw this stimulus owing to inflationary fears.

Why the fuss about tapering?

The idea for tapering is simple, withdrawing money from the cycle with higher interest rates to lower inflation. However, the U.S. would have the additional challenge of balancing this with the rise in employment spurt by the rise in economic activity.

For investors globally, this stimulus becomes imperative for the asset-buying rush created by near-zero interest rates in the U.S. This could also affect a country’s foreign portfolio inflows. Foreign institutional investors once with lesser money in hand would want to withdraw from investing in global economies. The investee country is now completely dependent on its domestic retail investors. Though India is better placed with stronger retail investors via mutual funds and direct investments, foreign portfolios still serve as a huge asset. It helps reduce pressure on the domestic currency.

IPO sentiment did not ease anxiety in November

November was supposed to be a blockbuster month. Sensex had hit a record high on October 14, gaining 568.90 points or 0.94 per cent at 61,305.65. This was on account of positive quarterly earnings posted by companies, including the likes of Infosys and Wipro. Investors were confident that the sentiment would be carried forward next month. Courtesy: big-scale IPOs of fintech app Paytm and beauty products e-retailer Nykaa.

Paytm failed to make an impression on bourses. It opened at about a 9 per cent discount on both BSE and NSE. This was days after Nykaa’s notable debut, opening at approx 78 per cent above its issue price.

The Paytm debacle led rival fintech platform MobiKwik to delay its IPO plans. Analysts had suggested Paytm’s overvaluation and the subsequent unimpressive IPO would have a spillover effect on future IPOs, especially tech IPOs. It would, therefore, be safe to assume that IPOs did not do enough to rescue the anxiety in the market.

The loss of investor sentiment could potentially get carried forward in December. The newer version of the Coronavirus brings with it sizeable uncertainties and anxieties. The Fed outcome is expected to offer clarity on one front, but concerns about a potential repeat of the second wave which ravaged the economy early this fiscal year cannot be ruled out.