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Nachiket Kelkar
Nachiket Kelkar

MARKET WRAP

Sensex, Nifty crash over 1 per cent amid a global equity sell-off

PTI6_24_2016_000121A [File] A crash in the US market led to a panic among investors globally | PTI

It was another day of sell-off across equities as a crash in the US market, led to a panic among investors globally. From Japan to London, most of the major stock markets traded deep in the red on Friday as rising bond yields is putting pressure on equities, driving fund outflows from stocks.

Back home, the BSE Sensex closed 407 points or 1.2 per cent lower at 34,005.76 points. The NSE Nifty 50 index tumbled 122 points or 1.2 per cent to 10,454.95 points.

Since a life high of 36,443.98 points on January 29, the Sensex has now corrected close to 7 per cent and the Nifty 50 too has slipped 6.50 per cent.

US markets crashed 4 per cent on Thursday; the Dow Jones Industrial Average fell 1,032 points, the second time this week that it has fallen more than 1,000 points, in a volatile session.

The losses later extended to Asian markets, where the Shanghai Composite Index plunged 4 per cent and other markets including Japan's Nikkei, Hong Kong's Hang Seng and Korea's Kospi declined 2-3 per cent.

European markets also later fell, with the UK's FTSE 100, German DAX and France's CAC 40 among others falling around 1 per cent or more.

The correction had begun last Friday after a strong US jobs data raised inflationary concerns and worries that the US Federal Reserve would raise interest rates faster.

The yields on US benchmark 10-year treasury note hit a four-high high of 2.885 per cent on Monday and touched 2.884 per cent on Thursday. The higher yields may drive some money from stocks, which were anyways trading at record valuations, to bonds, putting pressure on equities.

The Bank of England has also hinted that the pace of interest rate hikes may have to be increased if the economic growth remained on track.

Back home too, bond yields have risen, as concerns over inflation and government's fiscal deficit rise.

Furthermore, the proposal of levying long-term capital gains tax of 10 per cent on equities if the gains in a year exceed Rs 1 lakh and tax on dividends distributed by equity funds at 10 per cent, had also made investors nervous.

So far in February, FIIs have pulled out Rs 3,838 crore from India's equity markets, while investing Rs 4,572 crore in debt, according to data from depositories.

The steep increase in domestic and global bond yields may have stirred the market out of its complacency, said Sanjeev Prasad, co-head of Kotak Institutional Equities, this week.

“The steep correction in stock prices over the past few weeks reflects a partial retracement of the sharp increase in stock prices and multiples over the past 12 months, which is more visible in the mid-cap stocks. For several months, the market had been overlooking the often flimsy reasons for the rapid increase in multiples with stock prices being driven by a combination of improvement in fundamentals (earnings and return on equity), improved fundamentals in turn inflating investment theses for stocks by a section of the street and technical factors,” said Prasad.

Banking stocks were among the big losers on Friday, with Yes Bank, ICICI Bank, State Bank of India, HDFC, Axis Bank and Kotak Mahindra Bank among others falling 1-2 per cent.

Tech stocks (Infosys down 2 per cent, Wipro down 1.6 per cent), auto stocks (Bajaj Auto, Hero MotoCorp and Tata Motors down over 1 per cent) also saw selling pressure.

Larsen & Toubro, Reliance, ITC, Maruti Suzuki were among the other bluechip losers on Friday.

Corporate earnings have seen a further recovery in the October-December quarter and analysts say it is crucial for the improvement to hold going ahead, if markets are to stabilise.

“Earnings so far in the third quarter have been good. If earnings continue to improve, it will give stability to Indian markets and the downside from here on could be limited. The PE (price to equity) ratio is getting re-rated, but there is unlikely to be any cut in earnings estimates going ahead,” said Vinod Nair, head of research at Geojit Financial Services.

Given the correction and near-term uncertainties in the market, Nair advises, one should churn their equity portfolio away from small and mid-cap stocks, which had run up sharply and focus on defensive stocks like fast moving consumer goods, pharmaceuticals and tech stocks for now.

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