What should Sensex bloodbath be blamed on? In 4 weeks, index sheds 4,367 pts, loses Rs 18.28 lakh cr; India near 2008 type crisis?
From September 14, when Sensex was at 38,090.64 points, the index dropped by a massive 4,367.11 points up till today - pre-mid session trade. This massive decline took place in just four weeks time.
Below 34,000-mark! This is the reality for benchmark index Sensex, which made a shocking nosedive and dropped over 1,000 points in early trade today. It’s maddening to see Sensex becoming the worst performer in emerging markets. The Sensex which touched new heights virtually every day up till August 2018, saw it’s fate turn so bleak in just last four weeks. The same is the case with Dalal Street other index, Nifty 50, which tumbled by over 300 points today. Both find themselves dipped in blood up to their noses at the hands of investors who are fleeing en masse. Looks like investors have lost all faith in trading in Indian equities as now no one wants to take a chance to put in their money. They are mostly voting with their feet, at the moment. The real question is, whom should we blame for such disaster in Indian markets? What has led to such negative sentiments. Why would Sensex tumble so badly in the first place, despite the country becoming the fastest growing economy. There are questions, we all need an answer for. In fact, the performance of Indian markets is even out of the hands of government so reversing sentiments is unlikely in the short term. In short! Sensex is on its own, and the outlook is turning increasingly defeatist.
At around 1208 hours, the Sensex did reverse its losses somewhat, and was trading at 34,045.46 below 715.43 points or 2.06%, whereas the Nifty 50 also followed the same movement and was trading at 10,237.45 lower by 222.65 points or 2.13%.
However, the fact cannot be ignored that Sensex today touched an intraday low of 33,723.53 - taking the overall performance down by 1,037 points from previous closing of 34,760.89.
But did you know, that from September 14, when Sensex stood at 38,090.64, it dropped by a massive 4,367.11 points till today. This massive decline took place in just four weeks time.
Not only this, the index lost a behemoth of Rs 18,27,988.58 crore. On September 14, Sensex’s market cap was at Rs 140.61 lakh crore, which has slipped to Rs 122.33 lakh crore.
It was just end of August, when Sensex was staring the 39,000-mark right in the eye. Even the analysts did not predict such a massive downfall for Sensex.
If we compare from all-time high of 38,989.65 recorded in August 30, then Sensex has dropped by Rs 20,88,160.72 crore. By end of August, Sensex had a valuation of Rs 143.21 lakh crore.
Whom should we blame for this dramatic downtrend?
Beginning with indexes - it is seen from the market performance, that S&P BSE Sensex 50 which tracks the 50 largest and most liquid companies has turned out to be worst performer.
In 4 weeks time, the S&P BSE Sensex 50 has dropped by a whopping 5,325.2 points or 158.38% from 34,620.59 market price to as much as 29,295.39-mark.
Then mid caps and small caps played their own role of being a spoilsport. S&P BSE Midcap has dropped by 2,811.35 points or 17.19% from 16,349.97 to 13538.65-low. Meanwhile, the S&P BSE Smallcap slipped by 3,266.32 points or 19.60% from 16,663.16 to 13,396.84-low.
Motilal Oswal says, “BSE Midcap and BSE Smallcap have struggled over the past few months, resulting in their underperformance to largecaps. BSE Midcap and BSE Smallcap Indices declined 12.2% and 15.6% MoM respectively in September. This has been one of the worst corrections in Midcap and Smallcap indices in many months.”
On weightage-wise, Sensex’s performance is motivated by performance of finance sector (including banks) which has about 39.50% weight, IT with 15.08%, oil and gas with 11.52% and FMCG with 9.82%.
In September, barring BSE IT (up 1.9% MoM) all other sectoral indices closed in red with BSE Realty (down 21%), BSE Auto (down 13%) & BSE Telecom (down 13%) being the major losers.
Up till today, the BSE Finance has now lost 894.77 points or 14.72% from 6,077.77 in September 14, 2018 to 5,183-mark this week.
BSE IT has lost about 1,684.38 points or 10.52% in October month, despite being the sole gainer in September month. BSE IT is now trading near 14,500-mark from previous 16,000-level.
Moreover, Sensex has already been suffering because of heavy selling pressure in auto and banking stocks. Both these sectors have given sleepless nights to Sensex. BSE Auto has plunged by 4,896.94 points or 20.19% from 24,246.86 on September 14 to 19,349.92-level in this week. Then BSE Bankex has given away 3,208.13 points or 10.47% from its level of 30,621.55 in September to as low as 27,413.42 this week.
FMCG and pharma sectors also joined the bandwagon of negative trend. BSE FMCG has given away 1,465.33 points or 12.14% from 12,068.07-level to 10,602.74-mark in four weeks. On the other hand, BSE Pharma was lower by 1,965.67 points or 12.10% from 16,236.47 to 14,270.80 mark in the same period.
Other losers were also - BSE Capital Goods down by 2,327.63 points or 12.54%, while BSE Realty taking massive hit - as it was down by 560.71 points or 26.76%.
Motilal says, markets witnessed sharp correction in the month of September amidst the deteriorating macros i.e rising crude prices, depreciating INR, tightening liquidity and ILFS debt default.
FIIs continued to remain net sellers in domestic equity, selling to the tune of Rs 96 bn in September while DIIs inflows was robust at Rs 125 bn.
The Reserve Bank of India (RBI) October 2018 policy also played a key role, in disappointing the investors, as everybody hoped for a rate hike. Instead RBI governor Urjit Patel decided to keep policy repo rate unchanged at 6.50% by changing stance to "calibrated tightening" compared to previous ‘neutral’. The new stance keeps the possibility for rate hike ahead.
Right after RBI policy, investors turned negative so much so, that even Indian rupee has clocked over 75-mark against US benchmark dollar index.
While the WTI crude oil prices have increased by 18% till Oct. 5th from USD 63 per barrel to USD 74 per barrel. Similarly, the Brent crude oil prices have surged by substantial 24% from USD 68 per barrel as on 1st Apr’18 to USD 84 per barre. India is very vulnerable to boiling crude oil, as it has its 80% import in this commodity.
Talking about today’s performance, Dinesh Rohira, Founder and CEO at 5nance.com said, "This deep selloff offers a perfect opportunity especially for value investors to beckon on discount price with view of keeping it on long-term basis. The current fall in market is relatively lower than what happen in 2008 financial crisis, and doesn’t give a material reason to fear.
Rohira added, “The medium correction in equity market is healthy for a bull-market rally and investors should capitalized on this discount opportunity with systematic strategy”.
Interestingly, one of the largest financial services provider Goldman Sachs has lowered its target for Indian equities.
In its research note, Goldman Sachs said, “We have been strategically overweight India since March 2014 as we expected pro-growth government policies and structural reforms to drive a pick-up in economic growth and a recovery in corporate profits. While earnings have improved, Indian equities have almost doubled over the past 5 years and outperformed the region by 60pp in USD terms.”
Goldman said, “Given elevated valuations and recent strong performance, we believe the risk/reward for Indian equities is less favorable at current levels and we lower our investment view from overweight to marketweight.”
So are we moving towards 2008 crisis that shook the world. This will be keenly watched.
India is in the position of financial crisis, with NBFC facing liquidity tightening, banks in need of funds, stressed assets on rise, while liquidity deficit continues.
The financial crisis in 2007 - 2008, which is also known as the global financial crisis, has been defined by many economists as the worst financial crisis after the Great Depression in 1930s.
In 2007, the crisis took place in the form of subprime mortgage in United States, and turned into a full-blown international banking crisis with the collapse of investment bank Lehman Brothers on September 15, 2008.
The factor in subprime mortgage crisis was high default rate which became a bubble that burst. Meanwhile, high mortgage approval rates resulted in a large pool of home buyers taking the prices of housing to peak levels.
This led to large numbers of homeowners to borrow against their homes as an apparent windfall. The bubble exploded by a rising single-family residential mortgages delinquency rate beginning in August 2006.
Furthermore, high delinquency rates took rapid devaluation of financial instruments like mortgage-backed securities including bundled loan portfolios, derivatives and credit default swaps.
However, the collapse in financial markets were prevented by bailouts of banks by national government, but stock markets still dropped globally.
Not only this, in many areas, the housing market also suffered, resulting in evictions, foreclosures, and prolonged unemployment.
With the collapse of Lehman, the crisis played a significant role in the failure of key businesses, declines in consumer wealth estimated in trillions of US dollars. Also it was a downturn in economic activity leading to the Great Recession of 2008–2012 and contributing to the European sovereign-debt crisis.
India have their own Lehman Brother crisis on hands in the form of defaulter Mumbai-based Infrastructure Leasing & Financial Services (IL&FS).
IL&FS has stolen the limelight and it can be said that there are similarities between this company and Lehman Brothers. Both were shining in their days and ignoring their miscalculations in their businesses which have led them to doomsday.
Being a 30 year old company, IL&FS has 256 group companies as on 2018, including subsidiaries, joint venture companies and associate entities.
As of March 2018, IL&FS consolidated total debt stands at Rs 91,091.3 crore, while its IL&FS Limited (Standalone) debt comes at Rs 15,935.4 crore.
Because IL&FS has defaulted on commercial paper, or short-term unsecured debt, investors are trapped in further losses. The CP which is key component of money-market mutual funds, gained popularity on the back low bank deposit rates and persistent inflation.
Knowing that IL&FS has about 256 subsidiaries, joint venture companies and associate entities, the quantum of loss is worrisome for India and investors.