Markets tumble after witnessing best week in 2 years
Stock indices fell, on weak global cues, after capping their best week in more than two years.
The benchmark S&P BSE Sensex dropped 0.2 per cent to 34,950.92 at the 3:30 pm close after swinging between gains and losses at least four times.
Thirteen of the 19 sector indexes retreated, led by a gauge of power-related companies, while some property stocks rose the most. The NSE Nifty 50 Index lost 0.3 per cent.
Drugmaker Cipla dropped the most among Nifty members, down 7.3 per cent, after its profit and revenue in July Nov 2,’18 Nov 5,’18 35,200 35,100 35,000 34,900 34,800 to September trailed analyst estimates. State Bank of India, the nation's top lender by assets, climbed 3.4 per cent after returning to profit. Nov 2,’18 Nov 5,’18 10,480
The Sensex recovered last week amid company earnings reports and a fall in oil prices. Headwinds such as the trade tension between the US and China and a domestic cash crunch continue to weigh on investor sentiment. Upcoming local state and national elections are adding to uncertainty.
“Volatility and price fluctuations are here to stay for the next three to six months, mainly as investors bet on all the possible outcomes in the run-up to the state and national polls," said Arun Kejriwal, founder of Kejriwal Research & Investment Services Pvt.
Five Indian states are headed for polls this month and the next and the outcome is seen as an indicator of the voter sentiment on the Narendra Modi-led Bharatiya Janata Party national government, which in turn is expected to seek re-election around May 2019. The equity benchmarks are still down more than 10 percent from their alltime highest closes on Aug. 28. Yet, the stocks aren't attractive enough for some. Even as Nifty valuations decline, "it is not yet at levels which would suggest it is time to buy," Gautam Chhaochharia, analyst at UBS Securities India Pvt., wrote in a note to investors.
The NSE Volatility Index rose 6.9 percent, halting a three-day decline. Of the 42 NSE Nifty 50 Index companies that have announced results so far, 24 have either met or exceeded profit estimates. India’s valuations are at a premium compared to other EMs. There are reasons why some premium is justified – India offers one of the highest standards of minority protection in the world, deep and diverse markets, and good corporate governance standards. However, at present, other markets may look better, purely in terms of valuation. However, if the EM pack starts getting foreign flows because they have become cheap overall, India will also stand to benefit. If the flows improve, it will help stabilise the rupee and also provide temporary support to the market.
Given headwinds such as rising US dollar and bond yields, do you expect a turnaround in foreign flows?
We believe that both the factors are related and may be close to playing out. The Fed’s rate guidance may already be baked into markets, with path being laid out for another four rate increases that will get us to 3.25 per cent by September 2019. This means that the Fed stands to overshoot its own neutral rate by sometime next year. By next year, if global weakness seeps into the US market, the path may be less steep, which will be less supportive of the dollar and yields. In addition, mid-term elections in the US may lead to a lame duck presidency as odds favour loss in the house of representatives by the Republican President.
Till valuations become cheap on an absolute basis and macro environment more stable, FII flows will remain volatile. However, foreign flows also depend on overall EM flows, which should get better from here.
How do valuations look like after the correction? Do you see valuations undershooting long-term averages?
Valuations remain higher than long-term averages by 10-15 per cent for the Nifty. Valuation premium is even higher when you move to midcap stocks. Such a premium is palatable if the macro environment becomes stable and there is visibility around the next government formation. Valuations can undershoot in the near term in case we get an unstable outcome in next year’s election, or if the US-China trade war takes a turn for the worse. Investors should watch the meeting between Trump and Xi in December carefully as a China in crisis in the near term is not good for EM flows.
How big an event are the state and general elections from the market point of view?
State, not so much, since any outcome will get discounted. If results are not on expected lines, the argument will be that people vote differently in the central elections. From the market point of view, any stable government formation is a positive. As of now, the only stable possibility seems to be a government headed by the BJP. If another stable outcome emerges, that is also not too bad.
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