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Sensex, Nifty may slide further as risks come to the fore

LiveMint logoLiveMint 13-08-2017 Nasrin Sultana

Mumbai: Geopolitical tensions and the risks to economic growth highlighted in the government’s mid-term Economic Survey could trigger a bout of profit-taking in Indian shares as investors rush to safety, analysts said. 

The Sensex and the Nifty shed around 3.5% in the week ended 11 August, their worst weekly performance in 18 months. Mid-cap and small-cap stocks saw a sharper decline, falling 4.3% and 5.5%, respectively.

Some analysts warned that stocks might fall further.

Sensex is up 17.23% this year, despite last week’s steep fall. Graphic: Mint

“This kind of correction was expected as the markets were rallying with no fundamental support. Geopolitical tensions and Sebi’s order on the suspected shell companies were triggers that sparked the sell-off,” said Abhijeet Dey, senior fund manager (equities) at BNP Paribas Mutual Fund. 

US President Donald Trump’s threat of a military strike on nuclear-armed North Korea rattled investors across the globe. Benchmark indices across Europe and Asia lost more than 1% on Friday. In the US, the Dow and the S&P 500 posted their biggest weekly drops since late March. 

The market rout also provides an opportunity for investors in Indian equities to take some money off the table. Even though the Sensex and the Nifty have declined from their record highs in early August, they still trade at a premium to regional peers. According to Bloomberg data, the Sensex is trading at 18.15 times estimated earnings for the next one year and Nifty at 17.63. In comparison, the price-to-earnings multiple of the MSCI Emerging Markets index is 12.38. 

“Around 8-10% of the market correction is expected due to lack of any positive news trigger but that does not mean bull markets should turn into bear markets,” said Dey. 

Valuations are also high because June quarter earnings have disappointed in several sectors. With the transition to the goods and services tax expected to disrupt earnings for at least one more quarter, analysts are cutting their profit estimates for this fiscal. 

There will be a series of corrections in the markets going forward and any bounce back will be sold into, said independent market analyst Ambareesh Baliga. “Besides geopolitical tensions, macro indicators have also been weak which is disappointing for investors,” he said. 

June factory output declined by 0.1%, data released on Friday showed. According to the second volume of the Economic Survey presented by finance minister Arun Jaitley in Parliament on Friday, a raft of deflationary impulses is weighing on the economy, which is likely to miss the 7.5% upper band of its forecast growth range this fiscal. 

The survey flagged risks to growth such as the fiscal tightening by state governments owing to farm loan waivers, declining profitability in the power and telecom sectors, which will worsen the so-called twin balance sheet problem, and a local currency that has strengthened more than 6.3% this year. 

Still, volume support is strong and a very deep correction is unlikely, said Sunil Sharma, chief investment officer at Sanctum Wealth Management. “Flows are coming into the markets. Each sell-off is being met by large volume of purchases, creating a virtuous cycle and encouraging further flows,” he said in a 7 August note. 

Foreign portfolio investors have bought a net $8.93 billion of Indian stocks and local mutual funds and insurers have invested Rs30,394 crore year to date. These have propelled the Sensex 17.23% higher and the Nifty 18.63% this year.

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