Sensex has shed 1,200 points in the last three sessions, taking the benchmarks down to a two-month low.
Benchmark indices fell sharply again on Monday as foreign portfolio investors (FPIs) continued to sell stocks. Provisional data from the exchanges showed FPIs sold around $278 million worth of stocks; if so, this would take the value of equities sold in July to nearly $1.2 billion. With corporate earnings showing no signs of recovery and the government unwilling to roll back the surcharge on overseas funds structured as trusts, FPIs are taking risk off the table. Investor wealth of close to Rs 4 lakh crore has been wiped out in three sessions.
Andrew Holland, CEO, Avendus Capital Alternate Strategies, believes the outflows are a result of the Budget proposals. “There are not many measures in the Budget to kick-start the economy and the tax surcharge added to the concerns,” Holland told FE.
Analysts at Kotak Institutional Equities wrote on Monday that the government’s decision to raise taxes on automobile fuels, gold and high-income households in the FY20 Budget may have certain unintended macroeconomic consequences and may prolong the ongoing economic slowdown.
The broader market has been in bearish mode for more than six quarters now; the number of companies with a market capitalisation of Rs 1,000 crore or more has fallen to below 700 from the peak of 853 in Q3FY18. That’s despite the fact that FPIs were buyers in every month between February and June and indicates that the benchmark indices have been held up by the rise in just a bunch of stocks masking the weakness in the rest of the market. Sensex has shed 1,200 points in the last three sessions, taking the benchmarks down to a two-month low.
The government’s decision to increase surcharge on income of high-income individuals, analysts at KIE said,may affect demand for high-end real estate as the additional annual tax outgo is quite substantial at about 25-50% of the annual EMI related to a high-end property. “A further slowdown in sales of residential property may increase the current cash flow problems of certain real estate developers and by extension, the beleaguered housing finance companies,” they cautioned.
The slowdown in consumption has led to heavy selling in stocks. Harendra Kumar, MD of Elara Capital, said more than the NBFC crisis, investors are worried about the slowdown in consumption. “It is not clear whether the slowdown is structural or cyclical. But markets could rebound in August in the event of a rate cut. Also the 10-year bond yields have hit a decadal low,” he said.
Among emerging markets, India has witnessed the highest foreign outflow in July so far, followed by an outflow of $476.3 million from Taiwan.While South Korea attracted an investment of $1.01 billion, Thailand saw an inflow of $683.3 million.At 38,031.13, the Sensex trades at a price-earnings multiple of over 18.1 times one-year estimated forward earnings against the long-term average PE of 16.9 times. This compares with 11.5 times for Kospi and 15.3 for Jakarta Composite. Russian and Turkish equities were the cheapest in the emerging market with a forward price-to-earnings ratio of 5.6 and 6.1, respectively, Bloomberg data showed.
Historically, Indian equities have traded at an average P/E premium of 26% to the Asia pacific region, excluding Japan. The Nifty MidCap Index has shed about 8.6% between January and now, and 70% of its constituents have lost value. The Nifty Small Cap Index has lost 10.6% during the same period, and nearly 74% of its members have seen a fall in prices.