Global trade tensions rattle stock markets

Benchmark Sensex falls nearly 1%, most in four months

The Indian stock markets on Thursday saw the steepest fall in four months as escalating trade tensions between the US and China, the world’s two largest economies, weighed on investor sentiment.

The benchmark Sensex ended at 37,165, down 356 points, or 0.95 per cent, the most since April 4. On the other hand, the broader Nifty ended at 11,244, down 101 points, or 0.90 per cent, the most since June 27. The latest fall in the market follows stellar gains in July, when both the benchmark indices gained more than 6 per cent each. The small-cap and mid-cap indices gained more than 8 per cent last month.

Investors were seen taking some profits off the table following the recent gains. Foreign portfolio investors (FPIs) net sold shares worth ~6.4 billion, while domestic institutions sold shares worth ~3.4 billion. Interestingly, Thursday’s fall was largely confined to the blue-chip stocks as the BSE mid- and small-cap indices closed flat.

The latest trigger for global equities came after the US government confirmed it was considering the proposal to increase tariff on $200 billion of Chinese goods from 10 per cent to 25 per cent. All the Asian markets fell in the range of 1 to 2 per cent on fears of further escalation. The European markets, too, opened 0.5-1 per cent lower.

Telecom and auto stocks were the biggest drags during Thursday’s trade as their sectoral indices on the BSE fell 1.5 per cent and 1.3 per cent, respectively. Bharti Airtel, whose shares fell 2.8 per cent, was the biggest loser in the 31-share index. Kotak Mahindra Bank and Maruti Suzuki shares also fell 2.5 per cent and 2 cent, respectively. Shares of Reliance Industries were down 2 per cent during the session, pulling down the Sensex by 75 points – the most by any company.

Market participants expect this volatility to continue in the near to medium term amid weak global cues. The escalating tensions between the US and China along with sell-off by FPIs could be the biggest headwind for Indian markets, say experts.

“The escalating tensions between the US and China have created a weakness across global markets, including India. There are also domestic factors such as the general elections weighing on sentiment. We recommend investors to adopt a cautious approach towards equities. Consumption-related sectors along with information technology could offer some safety net for investors if there is a significant correction,” said Andrew Holland, CEO, Avendus Capital Alternate Strategies.

Analysts say recovery in corporate earnings and moderating crude oil prices provide downside protection for the investors. The sudden spike in the crude prices in the recent past had created anxiety among analysts. However, crude prices are showing signs of stabilisation at $70-75 per barrel. The price of crude oil jumped 20 per cent during the first six months of 2018 to touch $80 mark. Subsequently, it has showed signs of moderation on account of oversupply.

The corporate earnings of India Inc have managed to surprise analyst expectations. The net profit of the 470 companies that reported June quarter results went up 6.2 per cent year-on-year. Brokerage Citi India expects the earnings of India Inc to register 25 per cent growth in FY19. In a note to investors, Citi said most of the sectors saw positive earnings surprises which could provide impetus to the Indian markets. “However, valuations remain elevated, with India’s premium to emerging markets now about 60 per cent which is well above long-term average,” said Citi analysts Surendra Goyal and Vijit Jain in the report. The brokerage has raised its Sensex target to 37,300 from 35,700.