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Indian market catches cold as US equities cough up gains; should you worry?

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FIIs have already pulled out more than Rs 19000 crore from equity markets so far in October and over Rs 11,000 crore in the last two months, according to SEBI data

Global cues have always been relevant for Indian equity market. What happens in the US market always has some impact on domestic market as well.

The Nasdaq closed 12.4 percent lower from its August 29 record closing high, falling 4.4 percent for the day (October 24) in its biggest one-day percentage decline since August 18, 2011. In dollar terms, the Nasdaq vaporized $524 billion in market capitalisation overnight, said a Reuters report.

If we look at Indian counterparts, the S&P BSE Sensex and Nifty50 are down over 10 percent from the highs in August, while for the year the returns have turned negative.

On October 25, the S&P BSE Sensex breached 33,700 on the downside for the first time since April 9 while Nifty50 traded near its crucial support placed at 10,100 levels.

19,000 crore from equity markets so far in October and over Rs 11,000 crore in the last two months, according to SEBI data on Moneycontrol.com.

Rise in US Treasury yields, a sharp fall in the currency, along with rising crude oil prices which have in turn raised macro concerns for India are some of the factors which are putting foreign investors on the back foot.

Foreign investors are no longer overweight on India and rise in US Treasury yields is leading to money moving from risky assets such as equity markets to more risk-free assets such as govt bonds, suggest experts.

“Any increase in bond yields will create a sell-off in the equity markets. The recent sell-off in the global equity markets can be attributed to the same. The next rate hike is expected in December, which would further increase the US bond yields,” Steven Birch, President & CEO, William O’Neil + Co.

“We at William O’Neil, have moved the US market into a ‘correction’. The S&P 500 and Dow Jones Industrial Average sliced below their respective 50-DMA, and the Nasdaq Composite and Russell 2000 indices broke through their respective 200-DMA,” he told Moneycontrol earlier this month.

He further added that as the bond yields and interest rate increase, the economic growth will be halted and will put serious pressure on future earnings of sectors such as Utility, Basic Material, and Consumer Cyclical are below their 200-DMA which are trading below 200-DMA.

Lalit Nambiar, Executive Vice President & Fund Manager, UTI AMC told Moneycontrol that the tailwinds of lower US interest rates have benefitted most asset classes, including US equities since the global financial crisis of 2008.

“Now that the interest rates are rising, so is the dollar, it is resulting in a liquidity crunch resonating across markets, including EMs. Hence, it is quite likely that the asset classes which

One big factor which might be leading to a sudden change in trend i.e. moving from risky assets to the risk-free assets is the growth outlook. Institutions like IMF have forecasted the US GDP growth to slow down to 2.5 percent in 2019 and 1.8 percent in 2020, after growing 2.9 percent in 2018.

Citi has lowered its global growth forecast for both 2019 and 2020 by 0.1 percentage point each to 3.2 percent and 3 percent, respectively, it said in a note Thursday, citing policy tightening by the US Federal Reserve, according to a Reuters report.

Fall in growth rate might not augur well for the companies operating out of US. Corporate earnings have delivered growth for the last eight years. “Now, US is entering a zone of the high base with rising interest cost, inflation and energy prices. A dip in home sales and motor vehicle sales are lead indicators that growth may fall,” Dharmesh Kant – Head of Retail Research, IndiaNivesh Securities told Moneycontrol.

“Historical weight of evidence suggests that inflation above 2 percent mark for three consecutive years, rising energy prices and a higher interest rate trajectory coupled with GDP growth in excess of 2 percent for previous 3 to 5 years, leads to depletion in corporate earnings with a lag effect,” he said.

He further added that markets usually discount it 3 to 4 quarters in advances. The same played out in the US market crash of 2008-09. “Though this time around, the US scenario is not so alarming but a slowdown in 2019 and 2020 is very much on the cards,” concludes Kant.

 

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