The sell-off in Indian equities intensified on Thursday as worries over slowing global growth, escalating trade tensions, and rising US treasury yields spooked investors worldwide.
The International Monetary Fund (IMF) had on Tuesday downgraded its outlook for global growth from the estimated 3.9 per cent in July to 3.7 per cent in 2018 and 2019. On Thursday, IMF Managing Director Christine Lagarde said the global economy might not be strong enough to withstand the rising trade tensions.
The S&P BSE Sensex declined 2.2 per cent, or 759 points, to 34,001, the lowest close since April 11. In intra-day trade, the index had dropped as much as 1,037 points to 33,724. The market capitalisation of the BSE-listed companies witnessed an erosion of Rs 2.69 trillion. On a year-to-date basis, Sensex returns are now in negative territory. The 50-share Nifty slumped 2.2 per cent to 10,234, with only nine of its components ending with gains.
“Concerns about trade wars and global crude oil prices, coupled with the liquidity tightness back home, are weighing on sentiment,” said Navneet Munot, executive director and chief investment officer, SBI Mutual Fund.
US equities slumped on Wednesday led by technology stocks, as rising US Treasury yields triggered a flight of money from risky assets such as equities. The Dow Jones Industrial Average fell 832 points to below 26,000, the third-worst point decline in history. The Nasdaq dropped more than 4 per cent, the worst decline in terms of percentage since June 2016.
The dip in US equities roiled Asian markets on Thursday, with the benchmark indices in China, Japan and Hong Kong slipping at least 3.5 per cent. China’s benchmark equity gauge Shanghai Composite closed 5.2 per cent lower, the biggest loss since February 2016, and ended below the psychological 2,600-mark, according to Bloomberg.
The Hang Seng index slid 3.5 per cent, the most in eight months.
Back home, foreign portfolio investors (FPIs) dumped stocks worth Rs 29 billion, the provisional data showed. FPIs have offloaded stocks worth Rs 251 billion since August, taking their year-to-date sales to Rs 285 billion. In comparison, domestic institutions have shopped for equities worth Rs 968 billion this year.
The surge in domestic equity inflows has insulated the Indian equity market several times in the past few years. Flows in equity mutual funds through systematic investment plans continue to be robust (Rs 60-70 billion). While this is unlikely to get impacted significantly by the recent sell-off, lumpsum investments from retail and wealthy investors are beginning to taper off, believes SBI MF’s Munot.
“We expect Indian equities to grind lower in the coming months, given our expectation of further earnings downgrades led by higher interest rates, rising inflation, and its impact on economy, coupled with weaker-than-expected monsoon so far,” said Jitendra Gohil, head – India equity research, Credit Suisse Wealth Management, in a recent note put out by the brokerage.
Gohil said investors needed to be cautious as valuations remained stretched relative to peers and historical averages. Indian equities were trading at a 12-month forward price to earnings multiples of 16.1 versus 10-year average of 15. “While the domestic equity flows are slowing, they still remain high. We expect sharp slowdown amid heightened risk aversion. We maintain our ‘book profits’ call on equities that started in early September,” Gohil said.
The rupee closed at 74.1 against the dollar, down nearly 14 per cent in the year-to-date, making it the worst-performing currency in Asia. Global crude oil prices eased to $82 a barrel. Prices have been hovering near $85 a barrel, the most since November 2014, on fears that the impending sanctions on Iran’s petroleum industry would lead to constricted supplies. According to experts, high oil prices coupled with a weak rupee could disrupt India’s trade balance, increase the risk of fiscal slippage, and pose an upside risk to inflation.
A little more than 66 per cent, or 1,805, of the BSE stocks declined on Thursday. Twenty-eight of the 30 Sensex components and 17 of the 19 sectoral sub-indexes compiled by the BSE slid, with realty, IT and metal indices falling more than 3 per cent each. The basket of energy stocks gained after crude oil prices fell and on hopes that they would not be called to bear the excess subsidy burden. Investors will look for cues from the September quarter results in the coming days.