Indian equities saw an intense selling pressure on Monday as speculation over a sooner-than-expected interest rate hike by the US Federal Reserve weighed on global markets.
Benchmark indices fell the most in two months, with the 30-share Sensex losing 604.17 points to close at 28,844.78 while the broader Nifty declined 181 points to 8,756.75. The benchmark indices thus gave up 2%; reporting their highest daily loss since January 6.
Traders bet on the timing of a possible interest rate hike by the US central bank after data released on Friday showed stronger-than-expected recovery in the US jobs market.
The US unemployment rate in February fell to 5.5%, its lowest in six years and within the range of 5.5% to 5.2% that the US Fed deemed as a sustainable level for the long run. The strong payroll data — the US economy added 2.95 lakh workers to the job market in February — spurred speculation that the US Fed might consider hiking the interest rate as early as the summer of 2015. However, some experts said the US Fed might not give in yet because of the easing exercise carried out by central banks across the world.
Although the Fed’s decision to roll back the third round of monetary easing — known as quantitative easing (QE) — caused jitters in the market back in December 2013, a possible rate hike is considered to be a big development that could impact the direction of fund flows, especially for emerging market assets.
Not surprising then that on Monday, most of India’s counterparts in Asia retreated even as Sensex led the extent of decline. Indonesia’s Jakarta Composite, Taiwan’s Taiex and South Korea’s Kospi each declined by 1% whereas China’s Shanghai Composite index added 1.9%.
The profit-booking was largely driven by banking and metal stocks, with the Bank Nifty losing more than 600 points, or 3%. ICICI Bank, Axis Bank and Yes Bank led the decline, losing close to 4% of their value, while Sesa Sterlite and Hindalco also retraced 4-5%.
In a recent interaction with FE, Andrew Holland, CEO of Ambit Investment Advisors, had said that the market was likely to witness higher volatility on account of global risk aversion. “There is a lot of rhetoric about the US central bank considering a rate hike. And if the conviction goes up, stock markets would be really lower than what they are,” Holland had said.
The foreign portfolio investment number of Monday, however, fail to reflect the selling rush, given that according to preliminary data, FPIs bought R838 crore, or $134 million, of Indian equities on Monday. However, the data could also be distorted by any FPI buying into the bulk-sell of 56 lakh shares of HCL Tech carried out by the Shiv Nader Foundation, equaling R1,109 crore.
For the year so far, FPIs have poured $5.4 billion into Indian equities, similar to their purchases in Taiwan ($5.5 billion). However, the number also reflects fund flow that came in to pick up bulk sales in stocks like Hero Motocorp and Bharti Infratel, which were liquidated by promoters.
While there is a general argument that any negative impact of the US Fed rate hike would be counter-set by monetary easing actions carried out by central banks across regions, including Europe, Japan and China, the relatively high market valuations of India may be emerge as a hindrance in attracting this incremental money supply.
According to Kotak Institutional Equities, besides expectations of earning upgrades for FY16/FY17, India’s high valuations are supported by low perceived cost of capital globally and the ‘search’ for yields, given low yields across asset classes.
“Both BoJ and ECB are likely to pursue QE programmes for the next 2-3 years even if the US Fed raises interest rates in H2CY15. Thus, this factor may continue to support valuations at historically high levels until the global interest rate cycle turns unambiguously,” added the domestic brokerage in a research note dated February 28, 2015.
While the October-December quarter earnings came in below expectations, the commentary from corporate India had a cautious tone, too, leading to several earning downgrades. Bloomberg data show that the consensus Sensex EPS estimates for fiscal 2015-16 came down from R1,905 to R1,800 in the last two months.
Not surprisingly, the current market valuations — the Sensex is trading at about 16.5-times its one-year forward earnings — appear stretched. While the current valuations are at a four-year high, the macro-economic and corporate earnings appear quite divergent compared to January 2011 when the Sensex last commanded a similar price-to-earnings multiple.