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Taiwan, Moody’s cut in India GDP forecasts weigh on markets

Asian markets are trading at two-month lows as the commodity price surge fuels inflation fears and an earlier than expected hike in US rates

May 12, 2021 / 11:52 AM IST

Weak Asian markets and Moody’s paring its forecasts for India’s GDP growth for FY22 weighed on Indian stocks in early trades on Wednesday.

At 11:20 AM, the S&P BSE Sensex was down over 521 points, or 1.06 percent and the Nifty50 had shed 149 points (one percent).

Sectorally, selling pressure was seen in energy, banks, IT, finance as well as oil & gas while buying was seen in power capital goods, utilities and realty.

We have collated a list of factors that could be weighing on markets:

Weak Asian cues

The weakness in Asian markets was led by Taiwan which warned about rising COVID-19 risks pushing its stock market into a tailspin. The country’s benchmark stock index fell more than 8 percent on worries over the new cases, though infections are still relatively few, said a Reuters report.

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Taiwan largely closed its borders early in the pandemic and has a robust contact tracing and quarantine system. A rise in infection could lead to the shutting down of businesses, said the report.

Apart from adding to the negative sentiment, the fall in Taiwan could hurt Indian companies and stocks through a shortage in semi-conductors. The country accounts for about half of the world’s semiconductor output.

“Semi-conductor chips shortage is a bigger challenge,” said Kunj Bansal, CIO, Karvy Capital told Moneycontrol.

The fall in Taiwan stocks exacerbated selling in Asian markets for the second straight day. Asian markets are now trading at two-month lows, as commodity prices surge and the spectre of inflation loom large.

Inflation fears

Growing inflationary pressure in the United States could prompt the Federal Reserve to hike rates earlier than previously anticipated. A hike in US rates will make risky assets such as emerging market equities less attractive for investors.

MSCI's broadest index of Asia-Pacific shares outside Japan declined 0.5 percent, after tumbling 1.6 percent on Tuesday, its biggest daily percentage drop since March 24.

US Treasury yields have remained stuck in a tight range. The yield on benchmark 10-year Treasuries edged lower to 1.6235 percent, a far cry from the 2 percent level seen before the coronavirus pandemic, said a Reuters report.

The report further added that the U.S. Federal Reserve expects higher inflation though officials have pointed to transient factors and base effect for the temporary rise.

A pessimistic Moody’s

Apart from the global factors, rating agency Moody’s update on India also weighed on investor sentiment.

On Tuesday, Moody’s pared its India gross domestic product (GDP) forecast for the current financial year 2021-22 to 9.3 percent from an earlier 13.7 percent.

Moody's is not the first or only agency to cut GDP forecasts for India. Last week, S&P Global Ratings slashed its projections to 9.8 percent saying the second COVID wave may derail the budding recovery in the economy and credit conditions.

"The cut in GDP estimates may be taken negatively by the FPIs but not so much by domestic investors. The impact on the economy and earnings will be clearer over the next 1-2 months depending on the duration and nature of lockdowns," Rusmik Oza, Executive Vice President, Head of Fundamental Research at Kotak Securities said.

Lockdown extension

While the daily additions to COVID-19 cases has slowed, the crisis is still far from over and states are debating lockdown extensions. Already, states contribution to 90 percent of India’s GDP are under lockdowns.

Maharashtra, which alone contributes to 14 percent of India’s GDP, is likely to extend its lockdown till May 31, said news reports. An extended lockdown will naturally hurt.

“In this scenario, a wide range of consumption activities such as travel, tourism, restaurants, small ticket discretionary, and many others will be severely impacted,” Axis Securities said in a note.

Disclaimer: The views and investment tips expressed by 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.

 
Kshitij Anand is the Editor Markets at Moneycontrol.
first published: May 12, 2021 11:52 am

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