A market correction was only waiting for a trigger since the beginning of this financial year, and the IL&FS default just provided the spark.
After the sharp fall since August-end, the BSE Sensex is just 320 points away from giving up all the gains it had logged for this calendar. The 30-share index had advanced more than 7,500 points last year.
The Reserve Bank of India dampened market sentiment on October 5 after it refused to hike policy rate to help stem the slide in the rupee. The Sensex plunged 792 points on Friday after the money policy and settled the week with its biggest fall in two years.
So, has the bull tired out?
Centrum Wealth Research said in the worst case the current aged bull wont survive the current onslaught of macro meltdown, leading to the onset of a bear market.
But the good news, based on the experience of the previous cycles, is that any sluggish market triggered by a liquidity crisis wont be a long-term phenomenon. Generally, such sluggishness wears off in 6-8 months. Bear markets are intense, disruptive, disorderly, erratic and unsettling, but generally are very shortlived in comparison to bull markets. Further, such bear markets provide the foundation for the next bull market.
Most of the stocks that witnessed a surge in market capitalisation last year have been struggling this calendar.
For instance, Bharti Airtel has lost Rs 93,000 crore from its market cap so far this year after adding Rs 89,561 crore last year. Maruti Suzuki, IndianOil, BPCL, Vedanta, Motherson Sumi, Eicher Motors, Punjab National Bank, Vodafone Idea and InterGlobe Aviation have also witnessed Rs 16,000 crore to Rs 85,000 crore erosion in market capitalisations.
As many as 1,805 companies on BSE witnessed a rise in market capitalisation last year. As many as 1,886 have seen m-cap erosion in 2018 till October 5.
However, two best performers of last year continue to reward investors this year also. HEG, which rallied 1,455 per cent in 2017, has risen another 38 per cent this year till date, whereas Indiabull Ventures has gained 65 per cent after surging nearly 1,200 per cent last year.
On the other hand, California Software, which jumped to Rs 92.30 in December 2017 from Rs 7.50 in December 2016, is now hovering at Rs 37.70. Vakrangee and PC Jewellers are down over 85 per cent each. Both of these stocks had rallied over 100 per cent last year.
A whirlpool of macro headwinds and company-specific issues have put pressurise on the domestic equity market. There is also a liquidity squeeze amid tightening by central banks globally, which has caused US bond yields to surpass the psychologically important 7-year high level of 3.2 per cent, while Indian bond yields have tightened to a four-year-high of 8.23 per cent. The rupee hit all-time low of 74 against the dollar on Friday. A relentless rise in crude oil prices and a drop in Indias forex reserve have only added to the worries.
“The macro set-up was precariously poised for a perfect storm. It just needed a trigger for the meltdown, and the IL&FS default provided that,” said Centrum Wealth.
Besides the macroeconomic headwinds, forthcoming state elections will keep the market volatile in the coming months. However, Centrum Wealth said irrespective of the poll outcome, there is a high probability that the long-term bullishness of the market would sustain through election season volatility.
“If you look at Indias valuation compared with the emerging markets basket, we are still trading at a fair bit of premium. These global headwinds also need to kind of ease a little bit — global yields, oil prices. And now we have this gamut of whole domestic issues about fiscal deficit, lower GST collection and a question mark over the entire reform agenda turning towards populism. Given all those things, the outlook remains fairly hazy at least for the short term,” Inderjeet Singh Bhatia of Macquarie Capital told ET Now in an interaction on October 5.
Bank of America Merrill Lynch sees more pain ahead for the Indian market. Its year-end Sensex target of 32,000 implies another 7 per cent drop from Fridays trade.