To growth could trigger a correction in markets
MUMBAI: Geopolitical tensions that are weighing on equity markets globally and the risks to economic growth highlighted by the mid-term economic survey could be just the triggers investors in Indian stocks are looking for to book some profits, said analysts.
Last week, the benchmark indices the Sensex and Nifty shed around 3.5%, their worst weekly performance in 18 months. Midcaps and small cap stocks hurt more; they fell 4.3% and 5.5% respectively. They might correct further, said analysts.
“This kind of correction was expected as Indian markets were rallying with no fundamental support. Geo-political tensions and Sebi’s order on the suspected shell companies were triggers that sparked the sell-off,” said Abhijeet Dey, senior fund manager (equities) of BNP Paribas.
US President Donald Trump promising military action against North Korea had sparked a worldwide sell off on Thursday and Friday. Many benchmark indices across Europe and Asia lost more than 1% on Friday. In the US, the Dow and S&P 500 posted their largest weekly percentage drops since late March, Reuters reported. The global rout also provides an opportunity for investors in Indian equities to reassess positions.
Key to that are the expensive valuations of Indian stocks. Despite the Sensex and Nifty slipped 4% from their record highs in early August, they trade at a premium to regional peers. According to Bloomberg, the Sensex is trading at 18.15 times expected earnings for the next 1 month and Nifty at 17.63. The price-earnings multiple of MSCI Emerging Markets index is 12.38 in comparison. “Around 8-10% of markets correction is expected due to lack of any positive news trigger but that does not mean bull markets should turn into bear markets,” said Dey.
Valuations are high because June quarter earnings have disappointed in several sectors. With the transition to the goods and services tax disrupting earnings at least for one more quarter, analysts are cutting their profit forecasts for this fiscal year.
There will be a series of corrections in the markets going forward and any bounce back will be sold into, said independent market analyst Ambareesh Baliga.
“Besides geo-political tensions, macro indicators have also been weak which is disappointing for investors,” he said.
June factory output declined by 0.1%, numbers released Friday showed. According to the second volume of the Economic Survey presented by finance minister Arun Jaitley in Parliament on Friday, a raft of deflationary impulses is weighing on the Indian economy, which is likely to fall short of the 7.5% upper band of its forecast growth range this fiscal. The survey flagged risks to growth such as the fiscal tightening by state governments owing to farm loan waivers, declining profitability in the power and telecom sectors which will worsen the so-called twin balance sheet problem and a strengthening rupee, which has gained more 6.3% this year.
Still, volume support is strong and a very deep correction is unlikely, said Sunil Sharma, chief investment officer at Sanctum Wealth Management in an August 7 note. “Flows are coming into the markets. Each sell off is being met by large volume purchases, creating a virtuous cycle and encouraging further flows.”
Since the beginning of 2017, foreign institutional investors have bought a net $8.93 billion of Indian stocks and local mutual funds and insurance companies have invested ₹30,394.10 crore. These have propelled the Sensex 17.23% and Nifty 18.63%.