Is it the 'perfect storm' for Indian stock market? Well, maybe not
ET CONTRIBUTORS|
Updated: Sep 25, 2017, 11.01 AM IST
By Vinod Karki
In two days, Indian equity benchmark Sensex has tumbled over 750 points, raising fears that we could be facing the Perfect Storm. Or is it something else? Let’s have a look at what is causing this disruption.
The US Fed’s hawkish monetary policy stance and decision to begin its balance sheet reduction programme in October 2017 along with rising geopolitical risks coincided with other domestic challenges for Indian equities.
They include:
► fears of combined fiscal slippage due to the state farm loan waivers, uncertainty in achieving budget revenue targets, and proposed fiscal stimulus by the central government;
► sharp depreciation in the rupee (1.6 per cent in Sept’17) and spike in bond yields (14.1 bps in Sept’17),
► spike in CAD (2.4 per cent of GDP in Q1FY18 versus 0.1 per cent in Q1FY17) and slowing GDP growth (5.7 per cent in Q1FY18 versus 7.9 per cent in Q1FY17) largely on account of fixed asset investments (1.6 per cent in Q1FY18 vs 7.4 per cent in Q1FY17) and weak net exports (trade deficit of U$11.6 billion in Aug’17 vs U$7.7 billion in Aug’16);
► stretched valuations (+0.74 s.d.) ;
► recent outflows from Indian equities by FPIs (U$1.3 billion in Sept’17)
On the flip side extrapolating the above trends could be erroneous and we expect economic growth to improve in H2FY18.
Although the above-mentioned factors will impact stocks negatively, we believe the equity bull market is intact and Indian equities are currently in a consolidation/bull-market correction phase. Our analysis of the past bull market cycle (2003 – 2008 ) indicates that the median bull market correction was 14 per cent.
Structural shift in retail participation in equities (median deployment into equity mutual fund schemes of $1.4 billion over the last 12 months) will help cushion sharp fall in stocks. Government’s proposed fiscal stimulus around the festive season will have a positive effect on aggregate demand and stocks in the short-term. Readings from DMs indicate that gradual economic recovery is under way which is positive for global economic growth including EMs like India.
Our base case continues to be one of consolidation for the Nifty-50, resulting in time correction while the bull market correction scenario could result in a correction of more than 10 per cent. Given the systematic risk at play during the correction, we expect high beta stocks to correct the most.
Although the PE multiple for Nifty50 is stretched, the earnings continue to represent down-cycle fundamentals. Given the current scenario where we have an output gap in the economy coupled with deleveraging efforts, low capacity utilisation and stagnating earnings growth for a prolonged period (last five financial years average earnings growth is 4 per cent), the forward P/E ratio of 18.1 times is most likely to overstate the risk of growth faltering given the ‘low base effect’ and prospects of revival in the earnings cycle going ahead.
US Fed said it would start winding down its $4.5 trillion balance sheet in October 2017 by cutting $10 billion of maturing securities it reinvests every month. The limit will increase by $10 billion every three months to a maximum of $50 billion per month until the central bank’s overall balance sheet falls by perhaps $1 trillion or more in the coming years.
(Karki is a Research Analyst with ICICI Securities. Views carried in the column do not represent those of ETMarkets.com. Investors are advised to consult their financial planners before taking any investment call based on this analysis.)
In two days, Indian equity benchmark Sensex has tumbled over 750 points, raising fears that we could be facing the Perfect Storm. Or is it something else? Let’s have a look at what is causing this disruption.
The US Fed’s hawkish monetary policy stance and decision to begin its balance sheet reduction programme in October 2017 along with rising geopolitical risks coincided with other domestic challenges for Indian equities.
They include:
► fears of combined fiscal slippage due to the state farm loan waivers, uncertainty in achieving budget revenue targets, and proposed fiscal stimulus by the central government;
► sharp depreciation in the rupee (1.6 per cent in Sept’17) and spike in bond yields (14.1 bps in Sept’17),
► spike in CAD (2.4 per cent of GDP in Q1FY18 versus 0.1 per cent in Q1FY17) and slowing GDP growth (5.7 per cent in Q1FY18 versus 7.9 per cent in Q1FY17) largely on account of fixed asset investments (1.6 per cent in Q1FY18 vs 7.4 per cent in Q1FY17) and weak net exports (trade deficit of U$11.6 billion in Aug’17 vs U$7.7 billion in Aug’16);
► stretched valuations (+0.74 s.d.) ;
► recent outflows from Indian equities by FPIs (U$1.3 billion in Sept’17)
On the flip side extrapolating the above trends could be erroneous and we expect economic growth to improve in H2FY18.
Although the above-mentioned factors will impact stocks negatively, we believe the equity bull market is intact and Indian equities are currently in a consolidation/bull-market correction phase. Our analysis of the past bull market cycle (2003 – 2008 ) indicates that the median bull market correction was 14 per cent.
Structural shift in retail participation in equities (median deployment into equity mutual fund schemes of $1.4 billion over the last 12 months) will help cushion sharp fall in stocks. Government’s proposed fiscal stimulus around the festive season will have a positive effect on aggregate demand and stocks in the short-term. Readings from DMs indicate that gradual economic recovery is under way which is positive for global economic growth including EMs like India.
Our base case continues to be one of consolidation for the Nifty-50, resulting in time correction while the bull market correction scenario could result in a correction of more than 10 per cent. Given the systematic risk at play during the correction, we expect high beta stocks to correct the most.
Although the PE multiple for Nifty50 is stretched, the earnings continue to represent down-cycle fundamentals. Given the current scenario where we have an output gap in the economy coupled with deleveraging efforts, low capacity utilisation and stagnating earnings growth for a prolonged period (last five financial years average earnings growth is 4 per cent), the forward P/E ratio of 18.1 times is most likely to overstate the risk of growth faltering given the ‘low base effect’ and prospects of revival in the earnings cycle going ahead.
US Fed said it would start winding down its $4.5 trillion balance sheet in October 2017 by cutting $10 billion of maturing securities it reinvests every month. The limit will increase by $10 billion every three months to a maximum of $50 billion per month until the central bank’s overall balance sheet falls by perhaps $1 trillion or more in the coming years.
(Karki is a Research Analyst with ICICI Securities. Views carried in the column do not represent those of ETMarkets.com. Investors are advised to consult their financial planners before taking any investment call based on this analysis.)
