Indian stocks could weaken this week, mirroring the weakness in global markets, which slumped on account of an uncertainty in the US. Japans Nikkei 225 tumbled 5 per cent on Tuesday following an overnight fall of 2 per cent in Wall Street, triggered by US President Donald Trumps attack on the US central bank and a government shutdown in Washington.
Markets in India, Hong Kong, South Korea and Australia were closed on Tuesday on account of Christmas. Indian markets logged in losses for the third consecutive session on Monday, with the Sensex and Nifty down 0.8 per cent each. They have slipped nearly 3 per cent during the period.
The weakness in the local stock market was preceded by seven consecutive sessions of gains that saw the markets gaining over 4 per cent, aided by lower oil prices, governments recapitalisation measure for public sector banks, Reserve Bank of Indias liquidity boosting measures and appointment of new governor at the Indian central bank.
“India cannot be decoupled for extended period of time…asset prices globally are falling whether it is bond, real estate, equities or commodities,” said Sanjay Mookim, India equity strategist at the Bank of America Merrill Lynch.
Trump tweeted that the Federal Reserve board was the US economys only problem, adding to woes of markets which have been hit by concerns of slowing global economy, US-China trade dispute, partial US government shutdown and US Federal Reserve signalling more hikes going ahead. Last week, the US central bank raised rates, prompting Trump to call it a greater economic threat than China.News reports said Trump asked about the possibility of firing US Fed chief Jerome Powell.
Analysts said the turbulence overseas does not bode well for India.“Global valuations have fallen more than in India recently and India has outperformed MSCI EM in dollar terms which is not typical, said Mookim. “Indian markets could catch up on the downside,” said Mookim In contrast to November when markets recovered from two months of losses and gained about 5 per cent, Nifty and Sensex are down about 2 per cent in December. For the calendar year 2018, Nifty is up little over 1 per cent and Sensex is up 4 per cent.
Besides global concerns, India has its domestic woes to contend with. Investors are concerned about economic impact of farm loan waivers announced by several states in the aftermath of the state elections, which saw the Bharatiya Janata Party losing power in three key states.
“…India has its own domestic problems and the political environment has only accentuated the situation. In the short term, we expect the Indian markets to remain volatile with downward bias,” said Ravi Muthukrishnan, Head of Institutional Research at Elara Securities. “It provides an opportunity for long term investors to invest but short term investors should remain cautious,” said Muthukrishnan.
Market experts said foreign flows could be at risk as well if there is extended period of weakness in overseas markets.
Foreign Portfolio Investors have net bought local stocks worth Rs 2,400 crore so far in December, while mutual funds bought Rs 1,000 crore worth of shares this month till Friday.
“If we see continuous selling, then we may see some amount of FII money going out of the country. India is not decoupled from the world,” said Ayon Mukhopadhyay, director-UK and Europe, IIFL Institutional Equities, adding that domestic flows will act as a “natural hedge” to foreign outflows.
However, Mukhopadhyay said the global market sell-off driven weakness in Indian markets is more due to political reasons in the US and not due to an economic recession.
“The biggest boon for India is lower crude oil prices. I dont see much of contagion risk spreading…Markets going ahead will be a function of how earnings season pans out in the new year, how RBI policy is going ahead and what are the fiscal policies of the government,” said Mukhopadhyay.
Mookim said newer investors in the market are not used to multiple downcycle as fall of multiples has not been seen for several years.
“The trouble is that Indian equity valuations are not supportive especially for domestic-focused consumer stocks. My fear is that contagion could spread to India if momentum overseas continues to worsen,” Mookim pointed out.