Fear on D-Street

Tide of bad news has spooked the market

A n interest rate cut by the US Federal Reserve, the first since 2008, should have brought cheer to the equity markets. Instead the Indian markets saw huge swings on Thursday and settled lower in line with other Asian bourses. Though the Fed highlighted global growth concerns, it did not signal the beginning of a rate-cut cycle, leading to nervousness. As a result, the BSE Sensex, which had declined 2.1 per cent in intra-day trade, staged a partial recovery, closing the day 1.2 per cent lower. The broader market has been under stress for quite some time now, with the BSE MidCap and SmallCap indices down 26 per cent and 37 per cent, respectively, from their peaks. The Nifty is down about 9 per cent from its peak, but that’s because of a handful of large-cap stocks only.

For the Indian market, the global economy is only one of the concerns. It’s the local condition that is worrisome with a consistent flow of bad news. Since the IL&FS crisis erupted, non-banking financial companies have been badly affected. The new bankruptcy law, which was supposed to find quick resolutions, is still seeing a majority of the cases dragging on for two years. Jet Airways ended up in insolvency after being unable to find any suitor. Auditors and rating agencies are under the government’s scrutiny. Further, the Budget did little for industry, and the super-rich tax has spooked both the C-suite and foreign investors, some of whom will have to bear the additional burden. Other reports such as core sector growth slowing down to a four-year-low, an earlier-than-expected shift to electric vehicles, more powers to customs and excise officers, the amendment to the Right to Information Act, and the prospect of a jail term for violations of corporate social responsibility guidelines are not something that investors were looking for.

Fundamentals, liquidity, and sentiment — three of the key factors that drive stock markets — are all in short supply at present. First-quarter earnings have been disappointing across most sectors because the economy is in the midst of a severe slowdown and consumption is now sputtering. Automobile sales have been falling year-on-year for several months and growth in consumer products is also slowing. With a slump in assets across equities and real estate, the wealth effect has disappeared altogether, as domestic investors are seeing a large fall in their net worth. In such a scenario, they are going to hesitate before investing in equities. Foreign portfolio investors, who brought in net inflows of Rs 79,000 crore in the first six months of 2019, pulled out Rs 12,000 crore in July. Domestic institutions have been buying for the last three months, but if flows into mutual funds slow, even they would not be able to provide liquidity. Under the current scenario, a 25 bps rate cut in the policy next week from the Reserve Bank of India will not do much for the Indian markets.

Till there are clear signs of an earnings revival, investors may not commit fresh funds. But since the economy is slowing, an earnings revival may not happen fast. At this point, the best that the market can hope for is government action in terms of reforms that will help bring back investor confidence.