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Global concerns result in biggest weekly drop in 11 weeks, long term India story intact..

Indian equities posted their biggest weekly drop in 11 weeks, as global investors fled riskier assets on fears of a global slowdown, sparked by developments in China. Through the week, the benchmark BSE Sensex lost 700 points, or nearly three per cent, the worst weekly performance since June 7.

After falling as much as 476 points on Friday, the 30-share Sensex ended 242 points, or 0.88 per cent, lower at 27,366, its lowest close since June 19.

The National Stock Exchange Nifty ended 73 points, or 0.87 per cent, lower at 8,300 on Friday. Industry players said reports of relief on retrospective taxation to foreign investors helped the markets stage a partial recovery.

On Friday, foreign investors net-sold shares worth Rs 2,340 crore, showed provisional data provided by exchanges. For the week, the foreign institutional investor selling tally stood at about Rs 3,500 crore, as the rupee weakened 1.3 per cent against the dollar. Metal and banking stocks were among the major losers during the week.

Union Railway Minister Suresh Prabhu on Friday said he was optimistic about the Indian economy growing to USD 20 trillion in size over the next 20 years. Addressing the ICAI regional meet, the minister said that Indian economy could become USD 20 trillion over the next 20 years. To reach one trillion (USD) GDP mark, it took India 20 years, but it added the next trillion in just six-seven years. Our economy can double in every six to six-and-a-half years. The minister said that with the inflation in check and a prevailing conducive environment, the economy was looking up and foreign direct investments were increasing. There is a tremendous respect among investors for the efforts of the Prime Minister who are eager to invest in India.


Global Markets


Major Asian markets fell about two per cent, while European markets were trading about 1.5 per cent lower on Friday. For equity markets, the latest jolt came from data on manufacturing in China, which fell to a six-and-a-half-year low in August, exacerbating worries of a slowdown in the world’s second-largest economy. China's economic slowdown, recessions in Latin American countries such as Brazil and Chile, and a breakdown in commodity prices - combined with a thinly-traded market as many investors become more focused on tide charts than trading terminals - are prompting traders to overlook improving US economic data. There's a great deal of nervousness around the weakness in China, and that's overshadowing the fact that the US economy is sound and the European Union economy is firming.

Sales of existing US homes rose in July to their highest level since 2007. US auto sales, meanwhile, are on track for their best year in a decade.

Attention will return to those domestic metrics as the Federal Reserve begins its annual meeting in Jackson Hole, Wyoming, next week. Investors will be looking for any signs that the central bank is increasingly worried about global issues or whether it is going ahead with what had been a widely-expected interest rate hike in September.

The Fed has said its decision to raise rates will depend on data such as an improving jobs market and housing market. Should the Fed signal that it plans to raise rates, investor sentiment towards the United States and emerging markets may further diverge.

Minutes released Wednesday of the central bank's most recent meeting revealed Fed officials were concerned about "recent decreases in oil prices and the possibility of adverse spillovers from slower economic growth in China," a detail which helped spark the selling. At the same time, North Korea put its troops on war footing Friday after South Korea rejected an ultimatum to halt anti-Pyongyang broadcasts. The prospect of war, or signs of more global worries, could further dampen US stocks in the week ahead. The slowdown in China and other emerging markets such as Brazil is hurting commodity-related companies, but it is not enough to affect either 2015 or 2016 earnings estimates for the S&P 500 as a whole.

Crude oil

US oil prices headed for their eighth consecutive week of falls on Friday, the longest losing streak since 1986, after a sharp drop in Chinese manufacturing increased worries over the health of the world's biggest energy consumer. Activity in China's factory sector shrank at its fastest pace in almost 6-1/2 years in August as domestic and export demand dwindled, adding to worries about lower consumption of crude in the second-biggest oil user. Asian stocks followed Wall Street lower as fears took hold of a China-led slowdown in global growth. Both global oil benchmarks are near 6-1/2-year lows, with US crude heading for its longest weekly losing streak in 29 years. In late 1985, oil prices slumped to USD 10 from around USD 30 over five months as OPEC raised output to regain market share following an increase in non-OPEC production. US crude for October delivery was 1.21 percent lower at USD 40.82 a barrel by 8:47 a.m. ET. On Thursday, the September US crude contract saw its lowest intraday trade since March 2009 at USD 40.21 a barrel before it expired at the market close. Brent oil was on track for its seventh weekly decline in eight, down 1.82 percent at USD 45.77 a barrel, after settling 54 cents lower on Thursday.

Ajcon’s view

The fall in the Indian markets during the week was less compared to other emerging markets: the Indonesian market fell about five per cent, South Korea six per cent and China about 10 per cent. Unlike other emerging markets, India stands out as relatively less vulnerable to a slowdown in China, as it is not part of the Asian supply chain yet; it is a domestic demand-driven economy and a net commodity importer. We believe India is “among the least vulnerable”, as an impact on the country’s growth will be minimal and lower commodity prices will positively impact current account deficit and inflation.

We recommend accumulation in fundamentally strong midcap stocks available at attractive valuations in Infrastructure, Real Estate, Engineering, Automobiles, Capital Goods, Packaging, Logistics and Pharma. The investors should be cautious in picking those midcap stocks which have already run up to more than 50 to 100 percent in the last six months.



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"Forum Views" Magazine Published by Brokers Forum of India. (April 2014)
Your friendly advisor since 1986,
Ashoka Ajmera

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