Global volatility, slump in oil prices drag Indian markets

Sensex sheds 300 points for second day; Chinese stocks post biggest drop since 2009

Following a slump in Chinese stocks and a sharp drop in crude oil prices, Indian markets on Tuesday closed at levels last seen in October-end. While weak oil prices led to scepticism over global economic growth, a five per cent drop in China’s benchmark index triggered huge sell-off in stock markets globally.

The benchmark Sensex closed 322 points lower at 27,797.01, the lowest closing level since October 30 and about 1,000 points below its November 28 all-time closing high. The broader National Stock Exchange Nifty shed 97.55 points at 8,340.7, with only five, or 10 per cent, of its components ending with gains.

The rupee closed at 61.89 a dollar, compared with its previous close of 61.83 a dollar.

The Shanghai composite, which had rallied about 20 per cent in just 10 days, ended 5.4 per cent lower on Tuesday, after China imposed bond market restrictions. After dropping four per cent on Monday, Brent crude oil prices traded at about $66 a barrel, a level last seen five years ago. So far this year, oil prices have fallen about 40 per cent.

 

“There was quite a bit of volatility in global markets. This is putting a lot of pressure on Indian markets,” said Andrew Holland, chief executive officer, Ambit Investment Advisors. He added the situation was similar to October when Indian markets had seen a correction, following high volatility in European markets.

“The market has had a heady run and China was probably the excuse for a correction. However, this is more in the nature of a punctuation mark; the bull market still seems to have steam left...The Budget will be the fundamental trigger. The market will look for some big-bang reforms and there are hopes these will come through in the Budget,” said Ramesh Damani, member, BSE.

Volatility index India VIX rose three per cent, as traders braced for more volatility in the coming days. Analysts said the market was precariously poised, adding there could be further correction. Shrikant Chouhan, head (technical research), Kotak Securities, said, “The benchmark Nifty is close to its major support of 8,300. If it fails to sustain above it, the fall could go up to 8,200.”

On Tuesday, foreign institutional investors sold shares worth Rs 222 crore, provisional figures by stock exchanges showed, while domestic institutions sold shares worth about Rs 350 crore. ONGC, Larsen & Tourbo and State Bank of India saw huge selling pressure. Metals stocks continued to record losses, owing to a poor outlook on commodity prices due to weakness in China’s economy.

 

While Sterlite Industries fell five per cent, Tata Steel and Hindalco lost three per cent each, extending their recent declines.

"There could be further profit-booking by investors, as we are nearing the end of the year. This could bring the market down in the short term. However, nobody has changed their mind on India's long-term potential," said Holland.

After rallying about 30 per cent this year, the Indian market is trading above its long-term valuations. At 15 times the 2015-16 estimated earnings, it is somewhat above the longer-term average, says Rakesh Arora, head of research (India) at Macquarie Capital Securities. "In 2009, a strong and stable government pushed the market to a 17-18 times PER (price earnings ratio), which sustained for 18 months. In that context, the current multiples are still reasonable. We believe any further re-rating will be driven only by a faster economic recovery/ reforms and earnings growth."

On Tuesday, selling was recorded across the board, with about two stocks declining for every one that rose on BSE. The BSE small and mid-cap index fell more than the benchmark indices.