Ongoing global turmoil and lacklustre FII participation to drive consolidation
Stock markets keep going up and down, but what really matters is the overall trend which decides whether it is a bull market or a bear market. Since the decisive victory of the BJP in the Lok Sabha elections, Indian equities are going through the roof, driven by strong flows from foreign investors. Markets have moved up by over 30 per cent since May 2014. Such a sharp rise in indices in a short period of time is often followed by minor corrections and periods of consolidation. Such corrections are healthy from a long-term technical perspective.
Since the last two months, Indian markets have been on a roll. Between 16 October and 28 November, the NIFTY rose by over 840 points (10.8 per cent) from 7748 levels in just 29 trading sessions. Such sharp moves are often followed by sharp corrections. Indian markets are going through the intermittent corrective phase. Since 28 November, the NIFTY has fallen by 520 points (6.1 per cent) from 8588 to 8068 (16 December) in just 12 trading sessions.
Markets are currently under the ‘risk off’ mode. Investors are not in favour of taking risks due to the ongoing turmoil in global markets. There are various factors creating panic in the markets. Since the beginning of December, FIIs have reduced their buying into Indian markets and have turned net sellers in the cash market since last week. FIIs have sold over ‘7,500 crore in index and stock futures during 1-16 December 2014.
The fall in oil prices has created panic in global markets, especially for countries that are primarily dependent on oil and gas exports. While the fall in crude oil prices is benefiting oil importing countries such as India, it has started taking a toll on the finances of various oil producing nations. The production from unconventional sources of
energy has become unviable. OPEC has decided to keep oil production unchanged at 30 million barrels per day, despite the weaker-than-expected global demand for crude.
There are talks of Venezuela and Russia getting closer to default, as their economies are highly dependent on oil and gas exports to fund their finances. The Russian rouble has gone into a tailspin, tumbling the most since 1998, sliding past 60 for the first time. In a knee-jerk reaction, the Russian Central bank has recently raised interest rates sharply from 10.5 per cent to 17 per cent to support its currency. The Venezuelan economy is even more vulnerable to a fall in oil prices. A fall in the prices of crude oil has increased the risks of default and social unrest in the country which is already plagued by political instability.
Japan, the world’s third largest economy, has unexpectedly fallen into recession, despite adopting expansionary policies. The economy contracted by 1.6 per cent in the September 2014 quarter, after a sharp contraction of 7.1 per cent in the June 2014 quarter. Business sentiment in Japan worsened further in the current quarter.
The Chinese economy is also on a loose footing. Chinese bond yields rose sharply, reacting to new corporate bond market restrictions. China’s official bond clearing house clamped down on the corporate bond market, excluding 500 billion yuan from being used for bond repurchase agreement. The Central bank also hinted at a lower growth rate of 7.1 per cent in 2015, from an expected 7.4 per cent this year, further souring investor sentiment.
European markets are nervous due to the ongoing political concerns in Greece. There is a possibility of the eurozone edging towards recession. The ECB is under pressure to boost economic activity, and may announce another stimulus soon.
India’s macro numbers are not supportive either. Our trade deficit widened to the highest in 18 months in November as demand for gold pushed up imports; swelling to $16.86 billion, compared with $13.35 billion in October. The October IIP data was a shocker, contracting as it did by 4.2 per cent, as against consensus estimates of a 2.1 per cent expansion. This contraction in IIP was mainly due to de-growth in the manufacturing sector, which fell 7.6 per cent, as against a growth of 2.5 per cent m-o-m. The rupee has started depreciating and has fallen to 63.47 against the dollar.
December is considered to be a lacklustre month for the markets, with FII activity generally on the decline, as most FIIs go on Christmas and New Year holidays. Foreign fund managers avoid taking fresh exposures, as they typically earn their bonuses based on their annual performances.
Considering the ongoing turmoil and the ‘risk off’ in the global markets, there is a possibility of some more pain in Indian markets. The NIFTY may consolidate between 7700 and 8000 levels in December, post which it will resume its upward journey. Long-term investors should use this correction to buy quality stocks to benefit from the secular bull-run.
This article was originally published in Business India Magazine.
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