It’s not easy to predict where the stock markets are headed, but there are signs market observers look out for, such as earnings growth, fund flows and the strength of the underlying economy. Evidently, none of these is exhibiting signs of strength.
Earnings growth continues to remain anaemic. Foreign portfolio investors (FPIs) have pulled out nearly $2 billion from the equity market in July and growth of eight core sectors dropped 0.2% in June. The moot question is whether India is heading for a bear market.
Technically, a bear market is defined as a correction of more than 20%. By that measure, it may seem like a relief, since the Nifty 500 index has fallen about 10% from its high in early June. “You don’t need to look at the index. If you have 500 companies at 52-week lows, and not even 5 companies at their highs, then there is no question this is a roaring bear market," said Raamdeo Agrawal, joint managing director at Motilal Oswal Financial Services Ltd.
The depressing reality about this market is that this correction could easily worsen. While the share prices have come down, valuations have hardly corrected. This leaves room for further corrections.
Market expert Ambareesh Baliga said, “It could drag on into a prolonged downturn. Investors who have the capital to invest prefer to preserve it. Many other investors have decided to cut their losses and move out of the markets, irrespective of where stock prices are."
To make things worse, the budget included market-unfriendly measures such as a tax on certain FPIs and the rich. “The government is displaying a lack of respect for the markets," said a mutual fund manager, requesting anonymity.
Some of the pessimism stems from the slow economic growth rate. Core IIP (Index of Industrial Production) data is quite surprising, said Suvodeep Rakshit, an economist at Kotak Institutional Equities. “I think the markets are taking into cognizance the extent of domestic growth slowdown and its impact on various sectors. Also, the tone and guidance of the US Federal Reserve was not as dovish as the markets were expecting," he said.
The Fed chairman’s statement that the recent rate cut wasn’t a start of a rate cut cycle dampened market sentiment on Thursday as well.
Some market experts also said that the government looks clueless on how the problems of the economy will be solved, which is adding to the pessimism on the Street.
Some of the telltale signs of a slowing economy have been there for some time. “Post the budget, the sentiment has worsened. Some of the latest measures, such as the surcharge on FPIs and ultra high net-worth individuals , are clearly demotivating the markets. Besides, the government is not giving an ear to the voices in the market," said Baliga.
“FPIs are quite angry after the budget. The budget has disturbed the equilibrium of the market. India is not the only market for foreign investors. We have to compete with other emerging markets, and we need to create a level playing field," rues a veteran of the markets.
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