The recent rush of exiting FPIs and foreign investors means the bears have tightened their grip on the equity markets. The Smallcap and BSE Modcap indices slid to 35.4 percent and 25.2 percent from their highs in late 2018. The Finance Minister Ms. Nirmala Sitharaman also added to the flux by proposing the taxpayers in the above 2.5Crore slab pay more as a surcharge on the income tax rates. Since the announcement of the proposed budget on July 5th the total pullouts were valued at 149 billion USD in investor wealth. This move caused the exit of foreign investors in large numbers and their selling their shares to the tune of 1.87USD in July alone.
The contributing factors:
With the values of the aggregate market hovering at 2 trillion USD the FPIs withdrawal from the market affected the two benchmark indices. The two indices Nifty and Sensex were 6-7 percent short of their June highs post the budget announcements. The FPI sell-offs in the smaller companies hit a high indicated by the 35.4 percent in BSE Smallcap Index and 25.2 percent in the Midcap index.
A sudden and strong crude oil prices surge with the FPIs-foreign portfolio investors withdrawing from the debt segments has kept the pressure on the value of the Indian rupee and the equity markets. RBI on its part did intervene with the REER- Real Effective Exchange Rate as its basic focus. The interventions were sanguine and half-hearted and designed to keep the weakening steady.
The US scenario with its higher Fed rates will mean the dollars will flow back to the US and in 2019 the rupee will continue to steadily weaken as US dollars become a globally scarce commodity. The uncertainty over a clean Brexit deal hurts India too as money moves away and foreign investors prefer to invest in the safe bet of the rising dollar value.
The recovering markets post the BJP’s thumping victory in the recent elections was only momentary. Certain endemic Indian factors were the impact of a slow and insufficient monsoon causing spiraling of food prices and rising inflation rates, the bad-loans scenario of banking and NBFC sector, sluggish corporate results, and negative sentiments of the investor markets.
The main factors contributing to the slide of the indices since 2018 were the prices rising for crude oil to 86 USD for Brent and the Federal rates rising with the US dollar’s strengthening. WTI crude oil prices plummeted in October 2018 and November saw prices per barrel decline from the once 77 USD to 57 USD.
From March 2009 to date the decade has seen a silent and steady bull market with a 16 percent of CAGR in Nifty and Sensex values. The mid-cap BSE index outperformed the Sensex and Nifty showing an 18 percent CAGR. The best definition per se of a bear market would be one where stock prices fell by 20 percent. According to the Edelweiss Securities Head of Institutional Equities Gautam Shroff, the budget proposals and their uncertainty have caused a painful crisis in investor confidence.
The sale by FPIs of their stocks has caused a burden on the domestic investors who now solely support the equity market and is a bullish trend. According to Shroff, the pessimistic markets lack any positive control measures and may fluctuate either way. A lot of buying opportunities will be there if markets slid any further. The debt resolutions of failing companies and timely RBI interventions could shore up the markets he felt.
According to ICICI Securities and its data-evidence, it is hard to predict how low this deterioration can go. The factors of deteriorating investor sentiment towards the equity markets are the risk of default, systemic risk, declining operating environment, and questions on corporate governance. Their analysis pointed out that of a total of 228 stocks studied between the period of 2010-12 for larger than 75% price corrections showed only eight of them were able to scale back. The investors were shy of reinvesting on such challenged business models and this caused the near-permanent stock de-rating.
Based on FY20’s earnings, the Sensex is trading at 18.11 times against MSCI-World trading at 15.80. This global equity index represents the performance of mid-cap and large equity performance across 23 global and developed markets. And, despite the withdrawal of foreign investments and their sell-off in equities, Indian markets remain expensive.
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