Bear hug tightens

Indices are now down 19.8% from their peaks in March last year; Global funds withdraw $1.2 bn this year till Jan 19

India’s benchmark indices are within kissing distance of ‘bear market’ territory. With a 1.7 per cent fall on Wednesday, the indices are now down 19.8 per cent from their peaks touched in March last year. A 20 per cent fall in the prices generally signals the onset of a bear market. India, however, would be among the last major markets to enter the bear zone, being better placed than the likes of Brazil, China, Hong Kong, Taiwan, France and Germany.

It was another turbulent day for the benchmark indices on Wednesday, with the BSE Sensex slipping below the psychologically crucial level of 24,000 before recovering to 24,062, down 418 points. The 50-share Nifty closed 126 points lower at 7,309 as renewed concerns over global growth, slowdown in China and a further slide in crude oil prices routed equities across the world. (SENSEX SLIDES)

Despite the steep fall in the last 10 months, experts are unsure whether Indian equities are in a bear zone yet. “I don’t know whether this is the beginning of a bear market or a flash in the pan. As I see it, China will do something to control the mayhem there and put a lid on the market fall, at least in the short term,” said U R Bhat, managing director, Dalton Capital Advisors (India).

Experts do not expect a hard landing in China, as it has a current account surplus and annual gross domestic product (GDP) growth is unlikely to slip below six per cent in the next two years. However, there is a cause for worry if the Chinese currency drops more than five per cent this year, they said.

Bhat doesn’t see the Nifty falling below 7,200 levels in the short term, especially if oil prices recover from the current levels. “There has been too much pessimism. If the news flow turns a bit positive, it will prevent a steep fall,” he said.

According to Andrew Holland, chief executive officer at Ambit Investment Advisors, it is the fear of the unknown that has spooked markets worldwide, including in India. “No one quite knows how things will pan out. Is China in for a hard landing or will oil slip further? If things go wrong, fundamentals won’t matter because we are so linked with the global markets,” said Holland.

The silver lining, according to Bhat, is that overseas investors have so far been withdrawing in small amounts, about $1 billion or so every month. “These outflows can be easily offset by buying from domestic investors. The moment the foreign players start to withdraw about $3 billion or so, that’s when there will be a real cause for worry,” said Bhat.

This month, foreign institutional investors have already sold shares worth more than $1 billion. On Monday, they offloaded another Rs 1,324 crore worth of Indian shares even as domestic institutions purchased shares worth Rs 1,383 crore, according to provisional data.

Indian equities had begun their upward trajectory in September 2013, in the run-up to the general elections.

Between May 2014 and March 2015, the benchmark indices were on a roll, surging 25 per cent, on hopes that the Narendra Modi-led government would push ahead with much needed reforms.

In the 10-month period since then, the market has seen a sustained fall, as the risk-off sentiment among overseas investors made a comeback. A slowdown in China, poor monsoon and subdued corporate earnings also impacted the markets. China witnessed a slowdown, with the country depreciating yuan in a bid to put its economy on the path of recovery.