Sensex hits lowest close in a month; ₹ lowest in 6 months
WHAT’S AILING? Weak macro fundamentals main reason MUMBAI:
Indian stocks closed lower for the fifth session in a row on Monday as investors took money off the table because of concerns over high valuations and weakening macroeconomic fundamentals at a time of diminishing global risk appetite.
Both the Sensex and the Nifty closed at their lowest levels in a month. The Nifty lost 0.93%, or 295.81 points, to 31,626.63 points, after falling as much as 447.88 points earlier in the day. The Nifty shed 0.92%, or 91.80 points, to 9,872.60 points.
“India’s macros have weakened and if earnings disappoint, markets may stay under pressure. Earnings growth support is needed for foreign investors to take a more positive view on India,” said Sanjeev Prasad, managing director and co-head of Kotak Institutional Equities.
Economic growth decelerated to a three-year low of 5.7% in the June quarter while the current account deficit hit a four-year high in the same quarter at 2.4% of gross domestic product (GDP).
At the same time, geopolitical tensions over the US-North Korea standoff and the decision by the US Federal Reserve to shrink its balance sheet starting next month have lowered investor appetite for stocks.
On Monday, Asian markets such as South Korea and Hong Kong trended lower. European shares were mixed.
Indian stocks took a bigger hammering also because they are more expensive compared to peers. The Sensex is trading at 18.18 times one-year forward earnings, compared to five-year and 10-year historical averages of 15.24 times and 14.98 times, respectively.
“Fundamentally, the Indian market is still very expensive. The long-term story is intact, but in the near term pain may continue. We don’t see any earnings growth recovery happening in the near term, and definitely not for next two to three quarters,” said Gautam Chhaochharia, head of research at UBS Securities India Pvt. Ltd.
An earnings recovery is likely to be delayed as companies struggled with cash flows because of glitches in the 1 July implementation of the Goods & Services Tax (GST), triggering a surge in working capital requirements. GST was preceded by destocking and liquidation of inventory by distributors and retailers.
Since April, consensus analyst estimates for Sensex earnings for the current financial year have been slashed by 9.7%; for fiscal 2019, they have come down by 5%.
That, along with global disturbances, has been reason enough for foreign institutional investors to shun Indian shares. For the fiscal year to date, they have been net sellers of nearly $300 million of Indian equities, while domestic institutional investors bought a net of Rs. 49,371.7 crore. That has also been a big factor in the rupee plunging to a six-month low of 65.12 to a dollar on Monday, a level last seen on 24 March, down 0.50% from its Friday’s close of 64.80.
“With stretched valuations and delayed earnings recovery, I believe FIIs would think, why don’t I take some profits home?,’ said Andrew Holland, CEO at Avendus Capital Alternate Strategies LLP.
Some expect the consolidation to continue.
“The longer term concerns which we had six months ago still hold good. Investors should moderate their forward return expectations as valuations have spiked a lot,” said Vetri Subramanian, group president and head of equities at UTI Asset Management Co Ltd.