When the U.S. sneezes, India catches a cold. Veteran investors were reminded of this regular catchphrase of pink papers from the dot–com bust era as the benchmark indices fell more than 4% in day trade on Friday. This decline was the highest single-day fall since May last year.
At the day’s low of 48,890.48 points, the 30–stock S&P BSE Sensex fell nearly 2,149 points (-4.2%), before recovering nearly 210 points to close at 49,099.99 points—a decline of over 1,939 points (-3.8%) compared to Thursday’s close of 51,039.31 points.
On similar lines, the NSE’s Nifty 50 touched the day’s low of 14,467.75 points—a decline of over 629 points (-4.2%)—before closing at 14,529.15 points, which was over 568 points (-3.8%) lower then Thursday's close at 15,097.35 points.
While the benchmark indices had been routinely hitting new life–highs the past few weeks, at Friday’s close, the Sensex and Nifty 50 corrected over 3,416 points and 902 points, respectively, compared to their latest life–highs of 52,516.76 points and 15,431.75 points recorded on February 16. In just nine trading days, the Sensex and Nifty 50 have corrected 6.5% and 5.8%, respectively.
On Friday, the catchphrase seemed especially relevant as a steep hike in U.S. Treasury yields led to domestic markets succumbing to sell-offs, a very rare happening in an otherwise booming market recovering fast from the Covid-19 pandemic–induced economic sluggishness.
According to Joseph Thomas, head of research at Mumbai–based Emkay Wealth Management, the rising inflationary expectations in the U.S. and the consequent rise in bond yields have been a subject of intense discussion of late. “U.S. inflation is expected to rise in the coming months, and therefore, the U.S. yields too,” says Thomas.
The 10–year U.S. Treasury benchmark has already moved up swiftly to 1.5%. Markets, globally, seem to be taking no respite from the fact that Jerome Powell, chairman of the U.S. Federal Reserve, has indicated that economic recovery in the U.S. has a long way to go and the risks of a runaway inflation are quite low. “Rising inflationary expectations and the rising yields have a potential to adversely affect the equity sentiment and the equity markets,” Thomas warns.
Agrees Siddhartha Khemka, head of retail research at Motilal Oswal Financial Services. “Overnight, U.S. Treasury yields leaped to their highest since the pandemic began, leading to steep fall in global markets,” says Khemka about Friday's fall. “Rising bond yields, geopolitical tensions, and concerns over inflation have piled pressure on the market.”
Khemka further adds that high valuations do not provide much comfort, and the correction was long overdue. “Investors should take this opportunity to buy on dips while traders should trade cautiously with stock-specific action and book profits at regular intervals,” Khemka advises.
Rusmik Oza, executive vice president and head of fundamental research at Kotak Securities, says the massive stimulus which is likely to continue in this calendar year and economic recovery put together should provide support to market at lower levels. “For India, most of the factors driving markets are in place except for valuations,” he points out. “As time goes by India’s valuations will moderate making it a good buy–on–dips market going forward.”
In Oza’s view, the Nifty 50 range of 13,000 to 14,500 is an ideal range to accumulate stocks from a two-three years’ perspective. “Since valuations are still very much on the higher side it is not wise to invest and expect healthy returns in less than one year,” Oza explains. “As we go into the calendar year, we could witness further rise in bond yields, which will lead to moderation in equity valuations, thereby suppressing returns from a short– to medium-term.”
Rising bond yields in the U.S. have had a bruising effect on Indian equities, especially from the standpoint of foreign portfolio investors (FPIs). “As bond yields continue their upward journey, FPIs may turn away from Indian equities towards the [United] States for higher returns,” says Nirali Shah, head of equity research, at Mumbai–based Samco Securities. “This stance may negatively impact emerging economy currencies, especially [the Indian] rupee which would depreciate on rise in demand for the dollar.”
Shah is of the view that currently, bond yields have not touched worrisome levels and this appears to be a small correction. “Till the time inflation increases and is mild, equities will improve, of course with corrections,” says Shah. “Inflation can be looked at like a burning flame; as long as the flame is low there is no harm but if the flame intensifies, there could be a risk of getting burnt.”
While there are no dearth of challenges, one can take comfort from the views of Devang Mehta, head of equity advisory at Centrum Broking. Mehta argues that the Indian markets have seen a stellar rally in the past couple of months due to strong foreign investment flows, an improving macroeconomic situation, and the return of corporate earnings growth. “The ingredients of a structural bull market remain intact for India,” says Mehta. “Such ebbs and corrections will provide opportunities for long-term investors to take advantage of volatility and accumulate quality businesses at reasonable valuations and price points.”
Monday would see markets reacting to the GDP estimates for the quarter ended December 2020, which points at a growth of 0.4%—much lower than the 3.3% GDP growth recorded in the corresponding period last year. However, the positive growth is a respite when seen in the context of the contraction of 24.4% and 7.3% recorded in the quarters ended June 2020 and September 2020, respectively.
While India steps out of technical recession, the bad news is that the National Statistical Office (NSO) has lowered its estimate for real GDP growth during FY21 at -8.0%, compared to the -7.7% decline estimated on January 7. For Dhiraj Relli, MD and CEO of HDFC Securities, the downward revision of GDP is a bit disappointing. “The equity markets may be a tad disappointed with these data points but the mood at this point is anyway sombre,” says Relli.
Clearly, the bulls have challenging times ahead.