The key equity index Sensex dropped heavily on Wednesday after a relatively strong opening since the last 5 sessions. BSE Sensex plunged 500 points to hit the day’s low of 31,100.8 points – to its 2-1/2 month low, before closing down 440 points at 31,159.81 points and NSE Nifty shaved off as much as 157 points to mark the day’s low of 9,714.4 points before settling 136 points lower at 9,735.75 points. The pessimism amid the market participants is at peak as the tensions in the Korean peninsula remain elevated and the risk for a US Federal Reserve to hike the interest rate in December also grown after Janet Yellen’s remark. We take a look at eight reasons why Sensex crashed 500 points today.
Foreign Portfolio Investors exit
The FPIs (foreign portfolio investors) are pulling out their money from Indian stock market continuously as they had sold Indian equities worth close to $1.07 billion in September so far, after offloading stocks worth nearly $2 billion in August. On Tuesday itself, foreign investors sold shares worth $292.67 million, provisional data on exchanges showed.
North Korea fear still remains
However, there is no further blow from North Korea but worries still remain amid the market participants. Earlier last week, geopolitical tensions edged up after US President Donald Trump authorized stiffer new sanctions in response to North Korea’s nuclear weapons advances, which drew furious response from Pyongyang. North Korean leader Kim Jong Un retaliated by calling Trump “deranged” and saying he’ll “pay dearly” for his threats, while Kim’s foreign minister reportedly said the country might plan to test a hydrogen bomb in the Pacific Ocean.
China rating downgrade
The overall Asian market sentiments have been under pressure after Standard & Poor’s downgraded China’s credit rating, citing rising debt levels. S&P lowered China’s sovereign rating by one notch, to A+ from AA-, saying credit growth increased China’s economic and financial risks. Despite the cut, China still remains five notches above India. Earlier, the agency had warned that rising local debt was putting pressure on China’s performance.
“The downgrade reflects our assessment that a prolonged period of strong credit growth has increased China’s economic and financial risks.The increases have often been above the rate of income growth. Although this credit growth had contributed to strong real GDP growth and higher asset prices, we believe it has also diminished financial stability to some extent,” S&P said in a statement.
Concerns over steep valuations and poor corporate earnings for the June quarter have seen investors take risk off the table. Earnings estimates for FY18 are being trimmed with almost every sector having seen a downgrade. Net profits for the Nifty set of companies fell around 11% year-on-year in Q1FY18, disappointing the Street. The tepid growth in GDP for the June quarter, of just 5.7% year-on-year, has seen economists cutting their growth forecasts for the year. Geopolitical tensions have also weighed on investor sentiment.
Indian equities have been rallying since January 2017 even as economic growth had slumped to its weakest since the year 2014 and lower-than-expected corporate earnings in the first quarter of FY 2018. Despite the earnings decay, the Nifty’s estimated price-earnings ratio is almost two standard deviations above the 10-year mean, Bloomberg reported. This means the valuation of Nifty measured in terms of price-earnings ratio is exceptionally higher than its 10-year long-term average. The last time the ratio was that high, at the start of the global financial crisis in 2008, the gauge had its worst annual decline on record.
Brokerages have been expressing caution the Indian market is overvalued, trading at close to 20 times one-year forward earnings, well above its long-term historical valuations of around 15 times. Moreover, they have also flagged the downwards revisions to earnings estimates. “There is a clear and present risk to the earnings turnaround in FY19 as consumption, which has been the sole driver of growth, will not likely be strong enough due to weak fiscal push and job growth. The capex cycle remains nascent and limited to pockets of infrastructure,” Macquarie wrote in a report.
GDP under pressure
India’s GDP growth disappointed for the second straight quarter, slowing down to a mere 5.7% in April-June and pitting the country behind China on the list of world’s fastest-growing major economies. The 5.7% fiscal first-quarter GDP growth, of an economy desperately trying to recover from the shocking impact of demonetisation, was much lower than the 7.9% seen in the same quarter a year ago. It even slowed down from 6.1% in the preceding quarter.
Dull Wall Street
US stocks ended flat on Tuesday even as technology shares bounced from sharp losses in the prior session and comments from Federal Reserve Chair Janet Yellen boosted expectations of a December rate hike. Janet Yellen said the Federal Reserve needs to continue gradual rate hikes and it would be imprudent to leave rates on hold until inflation reaches the Fed’s 2-% target. The Dow Jones Industrial Average fell 0.05% to 22,286.04 points, the S&P 500 gained 0.01% to 2,496.94 points and the Nasdaq Composite added 0.15% to 6,380.16 points.