From Nikhil Kamath to Samir Arora, experts react after market rout over Fitch action

Recession

Equity indices traded in the red on August 2 after rating agency Fitch downgraded US’s sovereign credit rating to AAA.

At close, the Sensex was down 676.53 points to 65,782.78, and the Nifty was down 207.00 points to 19,526.50.

"Have to wait to see how much deeper it gets..," wrote Capitalmind CEO, Deepak Shenoy on X, formerly known as Twitter.

A solid 1.5% drop in the Nifty, 2.2% in the midcap index. USDINR too rushes up to 82.57 (up 35p)

It's a shareout, but we have to wait to see how much deeper it gets. While I don't see "reasons" yet (we'll have a bunch by tomorrow, I'm sure) but this is how markets behave.

— Deepak Shenoy (@deepakshenoy) August 2, 2023

Zerodha's co-founder, Nithin Kamath said that it's more about not losing too much in the bad times and not making the most during the good times.

#Bear markets are significantly more dramatic than bull, if this #bull run has lasted longer than usual and vix(volatility) is at a ridiculously low level, don't get carried away...

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Everything is cyclical, if there's one thing that doing this every day for 19 years has taught… pic.twitter.com/dBtkR8ncM6

— Nikhil Kamath (@nikhilkamathcio) August 2, 2023

Businessman Samir Arora also gave his two cents on the selloff

Sikander ne Porus se ki thi ladai
To hum kya karein

US ho gaya downgrade
To hum kya karein

— Samir Arora (@Iamsamirarora) August 2, 2023

Also Read | Fitch Fury: Rs 3.56 lakh crore of wealth wiped out as Nifty tests 19,500

Author Sathish on X.com says that even Fitch will be flattered by the importance (Indian) market has given to their ratings, considering the sell-off.

Market analysts weigh in. Here are their insights and forecasts (from Bloomberg):

Manish Kabra, head of US equity strategy at SocGen, draws parallels with 2011 playbook, yet optimistic about growth outlook, says short-lived profit taking is expected.

Manish Kabra: “The market will initially look at the 2011 playbook when we had a kneejerk, major risk-off reaction. But what’s different this time is the nominal growth outlook which is much higher than 2011, so I expect any profit taking to be short-lived. More broadly, if US bond yields can come down, that would be the signal that we’re getting closer to the end of the major risk-off signal. Before majority of institutional investors come out and buy equities, they would like to see the yield curve go positive. We would like to see that happen too before upgrading equities to a material overweight.”

Alec Phillips, an economist at Goldman Sachs, attributes Fitch downgrading of US credit rating to governance and fiscal concerns, foresees little market impact.

Alec Phillips: “The downgrade mainly reflects governance and medium-term fiscal challenges, but does not reflect new fiscal information. The downgrade should have little direct impact on financial markets as it is unlikely there are major holders of Treasury securities who would be forced to sell based on the ratings change.”

USD outlook bleak, risk-off sentiment could boost EUR and JPY, and investors could seek safety in defensive assets, says Andrew Ticehurst, a rate strategist at Nomura.

Andrew Ticehurst: “USD could underperform some of the majors, like EUR and JPY. Higher-beta currencies across Asia should fare less well of course if this news leads to some broad risk-off price action. Ironically, if this headline causes some risk-off price action across asset classes, money will likely flow to defensive assets, and that includes highly liquid US Treasuries.”

Chris Harvey, head of equity strategy at Wells Fargo & Co, says Fitch's downgrade unlikely to trigger 2011-like impact, says starkly different market conditions prevail, and adds pullback is anticipated to be short and shallow.

Chris Harvey: “Fitch’s downgrade should not have a similar impact to S&P’s 2011 downgrade given the starkly different macro environments and other reasons. Heading into S&P’s Aug 2011 downgrade, markets were in “risk-off” mode, with equities in a correction, credit spreads widening significantly, rates falling, and the GFC was still in the market’s collective conscience. Today, we have almost the opposite: IG credit spreads hit a YTD low of 112bps at month end, interest rates have been floating up, the SPX has returned 20% YTD, and many investors expect the Fed to cut rates by early 2024. As a result we believe any equity market pullback would be relatively short and shallow.”