Geopolitical tension weighs on markets as FIIs turn sellers
US intervention in Syria and Afghanistan, tensions in the Korean peninsula and President Donald Trump’s comments that the dollar is getting too strong, along with doubts whether the president will be able to keep his campaign promises have led to a sell-off in US equities and brought down Indian equities as well, but it is corporate earnings that hold key to the performance of Indian markets unless geopolitical tensions escalate, market participants and analysts said.
The BSE Sensex has lost 546.03 points or 1.82% and the Nifty is down 123.10 points or 1.33% from their record highs touched in April. Stocks that soared following a gush of liquidity and optimism after the Bharatiya Janata Party (BJP) won the Uttar Pradesh assembly election fell in April, mostly in tandem with weakness in the US markets.
MSCI World index lost 1.16% while both MSCI India and MSCI Emerging Markets gained around less than 1% in April.
According to Shankar Sharma, vice-chairman and joint managing director of First Global Securities Pvt. Ltd, geopolitical tensions won’t hurt Indian markets much, but earnings which may be disappointing are likely to play a major role. He said, “The markets will be more focussed on FY18 management commentary than the geopolitical tension, unless it becomes a bigger crisis.”
Kotak Securities Limited had said, in a April 10 note, that disappointment in earnings or on future outlook may result in cor- responding specific corrections. Analysts at brokerage firm Motilal Oswal also said that significant policy reforms like demonetization and GST, as well as policy changes like ban on liquor and judicial pronouncements pertaining to BS-III to BS-IV switch over for autos have added to element of uncertainty in earnings forecast. “The pace, frequency and magnitude of policy changes are precluding earnings predictability,” it added.
Another worrying factor is that foreign investors have started selling in Indian equities markets. In April so far foreign institutional investors (FIIs) sold $126.35 million after buying $4603.19 million in March. In total FIIs bought $7849.92 million in FY17, making highest purchase in March.
However, analysts at Kotak Securities don’t think there is any merit in the argument about ‘strong liquidity’ being primary reason for run-up in global and domestic markets. “Since we are in a ‘party’ mood these days, we would not want to spoil the mood by looking at an ‘alternative reality’ of some catastrophe resulting in all global markets being marked down significantly without any meaningful trades on the exchanges or money ‘leaving’ the market,” the brokerage said in a 13 April note.
Independent market analyst Ambareesh Baliga is not wary and said even if FII flow reverses, domestic liquidity will continue to support the markets. “Geopolitical tension may impact Indian market slightly as we are not globally isolated, but that will give fence-sitters an opportunity to enter into the markets,” he said.
The volatility index or VIX considered the best gauge of fear in the markets, fell 4.25% to 11.89 in April from 12.42 in March. A lower value for VIX indicates expectations of higher volatility.
Prakash Diwan, a director at Altamount Capital, agreed that right now, it is a war of words and the missile strike in Afghanistan is unlikely to hurt the Indian market rally, unless Russia or North Korea retaliate.