Almost all markets in the Asia-Pacific region saw widespread selling on May 19 following the mayhem in the US on the previous day. Indian markets were no exception and plummeted more than 2.5 percent intraday after opening negative.
The 30-pack BSE Sensex opened with a loss of 1,138 points, or 2.1 percent, lower than the previous day’s close, while the Nifty lost 323 points, or 2 percent, at the opening bell. At close, the Sensex was down 1,416.30 points, or 2.61 percent, at 52,792.23, and the Nifty was down 431 points, or 2.65 percent, at 15,809.40.
The erosion of the Sensex’s market cap meant Indian investors were poorer by Rs 6.39 lakh crore from a day earlier.
The volatility in global markets due to various factors has shaken investor confidence, evident from the fact that that the Sensex has lost more than Rs 17.59 lakh crore of its market capitalisation in May alone.
The mcap was Rs 266.98 lakh crore at the close on April 29 and has now collapsed to Rs 249.38 lakh crore.
Global factors at play
The selloff on May 19 was triggered by a more than 1,000-point fall in the Dow a day earlier amid concerns about economic growth after shares of retailer Target fell over 26 percent on rising fuel and freight cost and other retailers cut their earnings forecasts due to inflation worries.
Experts believe that deteriorating macro sentiments such as soaring inflation, recession fears and the prospect of the US Federal Reserve getting even more hawkish will continue to keep markets on edge.
“Growth momentum in the global economy is slowing down due to liquidity tightening by central banks, while the Russia-Ukraine conflict is also not showing any signs of easing with newer categories of weapons introduced in the conflict, which will keep energy and food prices high,” said Naveen Kulkarni, chief investment officer, Axis Securities.
Both these variables point to a stagflation scenario globally, which can lead to discretionary spending going down, he added, and fuel greater volatility worldwide.
The inflation bugbear
“Global inflation has become the biggest spoilsport and has derailed the economic growth recovery globally. The post-pandemic inflation which was once believed to be transient has now become entrenched and inflation rates are at a 40-year high in countries like the UK and US,” said Parth Nyati, founder, Tradingo.
India's wholesale price index or WPI-based inflation jumped to a 17-year high of over 15 percent in April, which many observers say will force the Reserve Bank of India (RBI) to further hike interest rates.
The inflationary impact is visible in the margin erosion of Indian companies as they announced their results for the quarter and year ended March 2022.
“The cause of panic in equity markets is a toxic trifecta of multiple compression (the ‘P’ of price-earnings getting adjusted lower or multiple de-rating), cost-led margin compression and impending slowdown in sales growth where the lethal combination of the last two factors is leading to fears of estimated earnings or ‘E’ of P/E getting slashed,” said independent market analyst Ajay Bodke.
The possibility of further challenges on the margin front is forcing brokerages to reassess their forecasts for India.
Bank of America recently revised its Nifty target to 16,000 points from 17,000, citing faster rate-hike risks, while UBS downgraded India’s GDP growth for FY23 to 7 percent from 7.7 percent.
Rate hike shadow
The Indian central bank released the minutes of its monetary policy committee meeting on May 18. One member of the rate-setting panel pressed for an immediate repo rate hike of more than 100 basis points, while others chose a less aggressive approach.
The shift in the stance of the RBI in favour of reining in inflation over fuelling growth is not encouraging for the equity markets, which had already received a jolt from the off-cycle interest rate hike in May. MPC tone only added to the jitters.
Grappling with the possibility of even more aggressive rate hikes by the US Fed to control inflation, foreign institutional investors (FIIs) have been on a selling spree in emerging markets.
They have taken out more than Rs 37,900 crore from India in May alone and have been net sellers in Indian equities for the past eight months straight.
“We expect markets to remain volatile in the near term but expect better market conditions in the second half of the financial year once markets price in the impact of global slowdown and higher rates,” said Kulkarni of Axis.Disclaimer: The views and investment tips of experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.