Dalal St Now Wants More
Investors didn’t bother to wait for the formal announcement of Narendra Modi’s new council of ministers on Monday, dumping stocks across the board after judging that markets were overbought in the wake of recent gains. Brokers said optimism over the allocation of portfolios in the new government has already been baked into the price and investors are now awaiting pro-business policy action to make the next round of purchases. The BSE Sensex dropped 459 points in a late-session sell-off, declining from its day’s high of 25,175 before closing at 24,716 points, up 23.53 points, or 0.10%. Nifty ended 0.11% lower at 7,359 points.
The rupee weakened 0.3% to 58.71 to the dollar, the most it has fallen in one day in a month. Mid-cap, smallcap, real estate and power stocks, which have been the biggest gainers in the last month or so, dropped the most on Monday. “The market event is over for now, investors want to see real action on the ground,” said Motilal Oswal, chairman and managing director, Motilal Oswal Financial Services. “Many stocks have surged between 50% and 200% in the recent rally, thus profit booking was waiting to happen. Having said that, the longterm fundamentals of Indian markets are still intact.” Foreign and domestic institutional investors were net sellers in the markets. FIIs sold equities worth Rs 84 crore on Monday, while DIIs sold equities worth Rs 208 crore, according to exchange data. Investors are looking to the new government to announce strong reforms to propel economic growth, with Modi adopting the principle of ‘Minimum Government and Maximum Governance’. “The merger of various ministries is very encouraging as this shows the intent of the new government to move things on the fast track,” said Nirmal Jain, chairman, IIFL. “However, investors should remain cautious as I expect market volatility to stay for a while.” To be sure, there seems to be an element of nervousness. The NSE India VIX volatility index jumped 12% to 19.84. The Sensex has rallied over 25% since September 13 last year, when the Bharatiya Janata Party named Modi as its candidate for prime minister. The benchmark index is currently trading at 15.5 times to its one-year forward earnings, compared with the five-year average of 14.6 times. The MSCI Emerging Markets Index trades at 10.8 times earnings and this high Indian market valuation is making some investors worried.
“I would like to hear more about reforms the new government has in mind and how it’s going to execute,” said Chris Palmer, head of global emerging markets at Henderson Global Investors. “One of the things that concerns us in the recent rally is the fact that companies which have been unsuccessful in the last 510 years have rallied the most.”
FIIs have pumped more than Rs 46,000 crore into equity markets so far this year as global investors have built up high expectations on India. The new government needs to take urgent measures to tackle economic challenges and this could make some investors skittish regardless of the potential long-term gains. For instance, the government will need to strike a balance between pro-growth measures and anti-inflation tightening given that the underlying fiscal situation may be worse than it appears. The government needs to urgently address India’s economic slump amid the threat of an uncertain mon- soon and inflation accelerating. On Monday, power sector stocks witnessed the maximum sell-off. Bhel fell 4.79% to .` 259.40 while Tata Power ended 4.11% lower at Rs 101.40. Among index heavyweights, RIL lost 2.38% to .` 1,101, while SBI fell 2.01% to .` 2699.80. Technical traders said markets are in the overbought zone, hence profit booking was bound to happen. The BSE Mid Cap Index fell 2.11% to 8,485 points while the BSE Small Cap Index fell 2.24% to 8,923 points.