Moneycontrol
Aug 11, 2017 02:54 PM IST | Source: Moneycontrol.com

Sensex, Nifty fall over 2% in 5 days. Find out why

Both Sensex and Nifty have lost a little over 2 percent between August 7 and August 11, 2017 and look set to end the week on this note.

Sensex, Nifty fall over 2% in 5 days. Find out why

Moneycontrol News

The Indian market has not had a good week so far. Benchmark indices have been trading weak continuously, and breaking new support levels with every passing day.

As of 2:50 pm, both Sensex and Nifty have lost a little over 2 percent between August 7 and August 11, 2017 and look set to end the week on this note.

Going forward, experts are anticipating the corrective phase to stay.

“We have just lost about 2 percent from the top and if this is a meaningful correction of anywhere between 5 and 10 percent, then over the next couple of months, you could actually see the Nifty go down to the zone of 9,300-9,500 and around those levels we start to look for a bottom,” Gautam Shah, Associate Director & Technical Analyst at JM Financial told CNBC-TV18 in an interview.

So, what has been dragging the markets lower? Moneycontrol takes a look at the factors that are hitting it currently.

Global cues

Geopolitical tensions are escalating at a global level, with talks of attacks being done between the US and North Korea. The latter has been in the news for testing of its missiles. In its latest series of war rhetoric, Pyongyang actually said that it was confirming a plan to attack the US territory of Guam with its missiles. To this, President Trump had said that any such moves by the country will be met ‘with fire and fury’. Further, Pyongyang also reportedly launch a missile off the coast of Japan a few weeks ago. The missile had reportedly landed 200 miles near the coast of Japan. Further, the government is also anticipating preparation of nuclear weapons and warfare.

Such developments have kept the global markets on the edge. Markets in the US, Asia and Europe have been seeing weak movements, which has spilt over to India as well. As a result of weak global cues, Indian markets too have been taking a hit. Experts on CNBC-TV18 also said that a global decline will see collateral damage on India as well.

Leaving companies shell-shocked

Earlier this week, the Securities and Exchange Board of India (SEBI) placed trading curbs on 331 companies, suspecting them to be shell companies in some cases.

Having said that, few of the companies contested this circular from the market regulator and have received relief from the Securities Appellate Tribunal (SAT) . Companies such as J Kumar Infra, Prakash Industries and Parsvnath Developers have managed to put a stay or lift the curbs imposed on them.

As a result, several such companies, mostly in mid and small caps took a hit as traders were anticipating subsequent action by the regulator for other companies as well. A fear on this part by investors led to intense selling on the D-Street and that has kept the market in check.

De-leveraging positions

Couple of segments in the market that led the rally so far was midcaps and smallcaps and had emerged as strong wealth creators. Having said that experts had also argued about the overbuying in the sector on the back of excess liquidity.

So, the current phase is also about traders who had long bets on these segments unwinding or deleveraging their positions on the back of a corrective sentiment settling in. This strategy has led to a fall in midcaps as well.

Valuations

A mismatch between valuations and fundamentals was being watched by several experts. They highlighted how that could affect the market going forward at the time when it was trading at higher levels.

“It will be a happy event (to reach 10,000), but I think it is a level from where you need to be careful. The market has gone up a lot. From this point, valuations are very expensive when the earnings are tepid,” Vibhav Kapoor of IL&FS had told CNBC-TV18 when the index had not hit the psychological mark. At the most, there could be a gain of 10-12 percent, but that is the maximum gain, he added.

Explaining the surge, he said the market surged on the back of benign global equity conditions and strong macros on the domestic front. But there are negative cues such as bad loan issue, stretched private sector balance sheets, and lack of earnings growth.

The overbuying on the back of excess liquidity, earnings disappointment, and bad loan issues, among others, raised concerns over the valuations. With the correction, this factor was also seen as one of the trigger for the market to fall.

Earnings

The results growth statistics from India Inc has been a mixed bag. Several experts had foreseen the season to be steady and better than previous years. Having said that, it was a shocker of a day as frontline companies posted disappointing results. The likes of State Bank of India, Hindalco, Cipla, Alkem Pharma have all posted poor earnings and that has led to the drag on the indices.

The current correction was also on expected lines as earnings revival has not seen so far, even Q1 earnings were a mixed bag, Mahesh Patil, the Co-Chief Investment Officer of Birla Sun Life AMC said in an interview to CNBC-TV18. He further said, "The current correction does not mean that we are at mouth-watering level." He wants to see some earnings visibility before deploying cash in the market. He is a bit defensive; therefore, he has increased exposure to consumer staples due to steady earnings.
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