Indian markets on Thursday saw the steepest fall in four months as escalating trade tensions between the US and China -- the world's two largest economies -- weighed down on investor sentiment.
The benchmark Sensex ended at 37,165, down 356 points, or 0.95 per cent, the most since April 4. On the other hand, the broader Nifty ended at 11,244, down 101 points, or 0.9 per cent, the most since June 27. The latest fall in the market follows stellar gains in July when both the benchmark indices gained more than six per cent each. The small-cap and mid-cap indices gained more than eight per cent last month.
Investors were seen taking some profits off the table following the recent gains. Foreign portfolio investors (FPIs) net sold shares worth Rs 6.4 billion, while domestic institutions also sold shares worth Rs 3.4 billion. Interestingly, Thursday's fall was largely confined to the blue-chip stocks as the BSE mid- and small-cap indices closed flat.
The latest trigger for the global equities came after the US government confirmed it was considering the proposal to increase tariffs from 10 per cent to 25 per cent. All the Asian markets fell in the range of one to two per cent on fears of further escalation. European markets, too, opened 0.5 per cent to 1 per cent lower.
Telecom and auto stocks were the biggest drag during Thursday's trade as their sectoral indices on the BSE fell 1.5 per cent and 1.3 per cent, respectively. Bharti Airtel, whose shares fell 2.8 per cent, was the biggest loser in the 31-share index. Shares of Kotak Mahindra Bank and Maruti Suzuki also fell 2.5 per cent and 2 per cent, respectively. Shares of Reliance Industries were down two per cent during the session, pulling down the Sensex by 75 points -- the most by any company.
Market participants expect this volatility to continue in the near- to medium-term amid weak global cues. The escalating tensions between the US and China, along with sell-off by FPIs, could be the biggest headwinds for Indian markets, say experts.
"The escalating tensions between the US and China have created a weakness across global markets, including India. There are also domestic factors such as the general elections weighing on sentiment. We recommend investors to adopt a cautious approach towards equities. Consumption-related sectors, along with information technology, could offer some safety net for investors if there is a significant correction," said Andrew Holland, chief executive officer (CEO), Avendus Capital Alternate Strategies.
Analysts say recovery in corporate earnings and moderating crude oil prices provide downside protection for investors. The sudden spike in crude prices in the recent past had created anxiety among analysts. However, crude prices are showing signs of stabilisation at $70-75 per barrel. The price of crude oil jumped 20 per cent during the first six months of 2018 to touch the $80-mark. Subsequently, it has shown signs of moderation on account of oversupply.
On the other hand, the corporate earnings of India Inc have managed to surprise analyst expectations. The net profit of the 470 companies that reported June quarter results went up 6.2 per cent year-on-year.
Brokerage Citi India expects the earnings of India Inc to register a 25 per cent growth in FY19. In a note to investors, Citi said most of the sectors saw positive earnings surprises, which could provide an impetus to the Indian markets in the near-term. "However, valuations remain elevated, with India's premium to emerging markets now about 60 per cent, which is well above long-term average," said Citi analysts Surendra Goyal and Vijit Jain in the report. The brokerage has raised its Sensex target to 37,300 from 35,700. The revised target, however, implies that the markets would remain flat for the remaining part of the year.