The US Federal Reserve is scheduled to meet over September 17-18 to consider a cut in interest rates. Market expects a 0.25% cut in rates. Credit Suisse prefers equity as an asset class in this low growth but accommodative interest rates environment locally as well as globally.
Stocks crashed for the second straight session on Tuesday and the rupee lost ground with investors apprehensive high crude oil prices could further stall the economy; India’s GDP growth slowed to a 25-quarter low of 5% y-o-y in Q1FY20. Foreign portfolio investors continued to pare their holdings, selling close to $113 million worth of equities. In September so far, they have sold $636.59 million. India has witnessed the highest foreign outflow at $4.8 billion among emerging markets since July, followed by an outflow of $1.7 billion from Taiwan.
In sync with the global sentiment, which has deteriorated following the drone attacks on Saudi Arabia’s oil facilities, the Sensex on Tuesday shed 642.22 points or 1.73% to settle at 36,481.09 points while the broader Nifty50 came off by 185.90 points to end at 10,817.60 points. The Bank Nifty plunged 723.25 points to mark its biggest single-day drop in nearly two months. With Tuesday’s fall, the gauge for bank stocks has given up its entire gain for 2019.
Global oil prices recovered on Tuesday to levels of $68.08 per barrel after piercing the $70 mark on Monday. However, investors appeared to be worried oil supplies would remain constrained for a prolonged period of time.
Gopal Agrawal, head (Macro Strategy) DSP Investment Managers, said things were looking positive after steps taken by the government to boost the economy, coupled with lower inflation and oil prices. However, there has been a knee-jerk reaction over the last two days and markets are adjusting to new data points. “I would say that oil prices even at this level is not a major cause of concern, but if it touches $80 per barrel or above it, things will start looking bad for India,” added Agrawal.
However, strategists believe tight oil supplies and higher prices are transient as the structural outlook on oil has not changed. With global central banks working in a synchronised manner to infuse liquidity, it could actually support capital flows into EM equities.
Vinod Karki, head (strategy) at ICICI Securities, explains, “Both India and China fell in the same range today. The structural view on oil has not changed and the current spike in prices is transient. As far as trends are concerned, we believe that a significant one is that globally central banks are coming to support growth in a synchronised way.”
Karki added: “The European Central Bank has already announced unlimited supply of liquidity and the US Federal Reserve will decide on a rate cut on Wednesday.”
The US Federal Reserve is scheduled to meet over September 17-18 to consider a cut in interest rates. Market expects a 0.25% cut in rates.
Credit Suisse prefers equity as an asset class in this low growth but accommodative interest rates environment locally as well as globally. “Valuations have come to a reasonable level, which should restrict major downside from here on despite weaker earnings growth,” the foreign brokerage said. Further easing by central banks should support emerging markets.
The sharp and prolonged slowdown in the economy and poor corporate earnings have prompted investors to pare their portfolios. However, globally central banks infuse liquidity in the system then emerging markets could be in for higher capital flows. This would particularly help Indian markets as earnings have come under pressure on slowing growth. For the three months to June 2019, the net sales for a sample of 2,179 companies grew at a lowest pace of 5.9%, compared to 9.5% in Q4FY19 and over 18% for the quarter ended December 2018, data from Capitaline revealed.
The broader market has been in a 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 693 on Tuesday from the peak of 853 in Q3FY18. That is 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. U R Bhat, Director at Dalton Capital Advisors believes that Indian equity markets are likely to remain range-bound with a negative bias going forward largely because of issues relating to international relations between US-China, US-Iran and Saudi-Iran which are getting worse. All these factors will lead to a risk-off trade and foreign portfolio investors (FPIs) will not be keen on investing in emerging markets equities. Adds Bhat, “As I said, markets will be negative, but we can see a sharp correction if the geo-political situation escalates or there is a war kind of scenario. Oil prices are likely to go up and it will have lot of implications for India and Nifty might go to 10,000 levels. Even after the recent correction in the markets some of the good quality stocks are still not available at attractive valuations.”
The Nifty MidCap Index has given up 18.9% in the las36t one year, and 74% of its constituents have lost value. The Nifty Small Cap Index has shed nearly 26% during the same period, and about 79% of its members have seen a fall in prices.The negative sentiment rubbed off on all sectoral indices on Tuesday. Of the 19 sectoral indices compiled BSE, BSE Auto and BSE Realty fell the most by losing 3.7% each.