The stock markets went through a big correction on August 5 after a turmoil in the global financial markets following fears of a recession in the US, fresh tensions between Iran and Israel, and a plunge in Japanese shares after the rapid appreciation of the yen, which undermines the export competitiveness of the country’s manufacturers. The BSE Sensex dropped 2,222.5 points, or by 2.7 per cent, to close at 78,759.40 points while the NSE Nifty fell 662 points (by 2.7 per cent) to close at 24,055.60.
However, the Indian markets bounced back on August 6, taking a cue from the global markets, with both the Sensex and the Nifty gaining ground during intra-day trade. Eventually, the markets closed in the negative, with the Sensex at 78,593.07, down 166.33 points, and the Nifty at 23,992.55, down 63.05 points.
However, the previous day, the bloodbath on the markets had seen a selling spree, leading to US stocks tumbling, with the S&P 500 index down by as much as 2.5 per cent in intra-day trade as the slowdown in the US July jobs data worried investors.
So, what does this mean for the Indian markets? Will the sharp correction lead to investors becoming more cautious? “It is hard to say if the recent sharp correction in the market will finally result in non-institutional investors becoming more cautious,” said a research note from Kotak Institutional Investors. “They have ignored the most recent negative developments (general election results and higher capital gains tax announced in the Budget). The growing number of non-institutional investors and their price-insensitive investment approach have been the primary drivers of the Indian market.”
The report went on to add that the spate of recent negative news (US slowdown, Israel-Iran tensions, sharp appreciation in the yen) may or may not be enough to dent the confidence of non-institutional investors. They have weathered more. However, the most innocuous events can change investment sentiment.
For instance, some ‘investors’ may decide that they have made enough returns in ‘narrative’ stocks with little valuation support, while some may want to protect high returns of the past 3-4 years and others may simply follow others ‘out’, as they have followed others on the way ‘in’Nagpur Investment. “A large portion of the flows into mutual funds (MFs) and from MFs into the markets simply reflect high trailing returns,” added the report.
Giving its outlook for the fiscal, the report said the sharper-than-expected weakness in US labour markets, a prolonged slowdown in China, and recession worries in Japan increase the risks to consensus earnings estimates for FY25. “Even our conservative estimates may have downside risks, as exports and commodity-oriented sectors contribute to 35 per cent of FY25 net profits of the Nifty-50 Index. Furthermore, geopolitical risks have increased in recent weeks, particularly in the Middle East, which may impact oil prices, and Bangladesh, which may impact certain companies,” it added.
Analysing the US economy, a research note from Nomura said the concerns on the lacklustre July employment data could lead to the US Federal Reserve cutting rates by a total of 75 basis points this year, with consecutive 25 basis points cuts in September, November and December. How does it impact the decision of Asia’s central banks? “The common view is that Asian central banks follow the Fed. Indeed, the Fed’s higher-for-longer stance had been a constraint on some Asian central banks, as wide yield differentials led to currency depreciation pressuresAgra Stock. As such, an easing cycle in the US will lower the hurdle for Asian central banks to cut rates. However, not all Asian central banks ‘follow the Fed’, and their domestic macro conditions and policy priorities are different,” the note said. For instance, the Reserve Bank of India is less influenced by the Fed decision.
Commenting on the long-term potential of the market, Nilesh Shah, managing director, Kotak Mahindra AMC, had told INDIA TODAY on August 2: “As far as the economy is concerned, we are expected to remain the fastest growing for some time. There are fundamentals in play. Our economy is doing well; inflation is under control, growth is higher, currency is stable. People are generally bullish about our economy. Markets are seeing a lot of liquidity. Domestic, global and retail, institutional, HNI investors—everyone wants to buy, so the price will remain high.”
Asked if the markets were overvalued, Shah explained: “Stocks were expensive three months ago and today they are even more expensive. Undoubtedly, there is a froth in the market. And froth doesn’t mean correction tomorrow.”
Going on to add why he was optimistic about the long-term potential of the market, Shah said: “The SME index is the best performing in the world, giving 66 per cent compounded returns for the past 10 years. Some SME companies may deserve the valuation, but not all. Second, if we look at some of the low-floating stock concentrated holding companies, banks trade at a valuation of FMCG companies, defence companies trade at a valuation that is premium to global defence suppliers. That gives you a feeling that there is some amount of froth in the market.”
When will that get correctedKolkata Stocks? According to Shah, the supply has to emerge. “If the root cause of limited supply is concentrated low float holding stocks, then it can be corrected only by supply. If supply doesn’t emerge, then this party can go on forever.” The party seems to have been disrupted for the moment, but experts feel the long-term story for the country is expected to keep the stock market buoyant in the days and weeks to come.
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