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Sensex ends down 1,624 – market reactions

Indian stock markets saw the biggest absolute decline (in terms of index points) today, with the benchmark BSE Sensex declining 1624 points and the Nifty down 491 points, or about 6%.

The sell-off was triggered by global capital shift away from equities, which have been going up more or less uninterrupted for nearly five years.

We give you what the experts and analysts have to say about today’s fall in the Indian stock markets.

Sahil Kapoor, Chief Market Strategist, Edelweiss Financial Services

Sahil Kapoor

Indian markets suffered its worst day in almost two years with a decline of 4% in today’s trade. This comes on back of significant decline of 3% in US stocks on Friday. Although sharp losses and gains in equity markets is a regular phenomenon, what stands out this time is the explosive rise of more than 40% in implied volatility (a measure of risk perception and an indicator of fear). While pondering over the most likely course for the markets, participants should take note of the factors which have led markets to this undesirable state.

1. The epicenter of this market volatility lies in problems faced by Commodity Producers and Emerging markets. While a sharp decline in commodity prices have created the fault lines, China seems to be at the epicenter of the recent bout of volatility. A 61% decline in Crude Oil in the last 1 year and large cuts in agricultural commodity prices have shattered the fiscal positions of most commodity producers like Brazil, Russia, Argentina and the OPEC leading to a sharp depreciation of these currencies. Slowing growth in China prompted the Chinese central bank to weaken Yuan in line with other Emerging markets triggering instability across the globe.

2. Growth concerns across world economies have risen sharply. This comes at a time when most central banks in the world are following divergent monetary policies. US and UK are inclining towards raising interest rates and Euro zone, Japan and China are committed to a loose monetary policy. Most emerging markets are unable to stabilize their domestic finances and international trade to limit damage to the economy. Recent steps from China to stabilize the stock markets have been under scrutiny and have resulted in little respite.

3. Economies which are largely dependent on exports of raw materials are particularly hit hard by slowing global growth and crashing commodity prices. This is clearly reflected in currencies of these nations like Brazil, Russia, Argentina and Malaysia falling more than 20% in 2015. Some of these countries have seen market carnage similar to that of 2008. On the contrary commodity consumers such as India have seen a much stable currency with Indian Rupee outperforming most other EM currencies by more than 20%.

Short term market moves are largely dependent on fund flows. A large number of portfolios are designed to reduce exposure during turmoil and a rise in volatility. Therefore the risk of overshooting expected threshold rises in such times. Increased exposure in a more volatile market may expose investors to unwarranted risk and compromise long term investment.

Although the above factors have caused a sell-off across the globe, we believe that this is a short term glitch and in the long term, India remains well-placed to outperform other emerging markets:

• The fall in commodity prices due to fears of severe slowdown in China will be beneficial to countries that are net importers of commodities like India. Copper prices have fallen to a 6.5 year low while the global Commodity index has fallen ~10% in the last month alone. Current account deficit for Q4FY15 came in at ~USD1.5bn (0.2% of GDP). Fall in crude prices to a 6.5 year low will further support our balance of payment situation.
• Inflation in India remains contained at ~4% levels, from very sticky levels of 10% backed by benign global food and commodity prices along with government measures to reduce supply side constraints.
• India’s Growth has started showing signs of pick up. Our growth for the previous fiscal was 7.3%. Indicators like IIP and Capital goods order book also show signs of India approaching a period of significantly high growth.

In conclusion, volatility is here to stay but it will create an opportunity for the patient participant looking to benefit from the long term Indian growth. Therefore it is prudent to let this period of volatility subside and use a less volatile period to build positions.

Birendrakumar Singh, AVP – Technical Research, Systematix Shares & Stocks

sensex

As the US S&P 500 index has just began its down fall and indicates the completion of 4 years of rally that had started in March 2009 and ended in July 2015. Its impact on the Indian markets would be as follow.

A comparison study since 2000 till date of the US S&P 500 and the NSE India index indicates the following likelihood:

The IT bubble burst of 2000-NSE index made a top in February, 2000 while the S&P 500 made a top after 7 months after the NSE index top i.e. in September 2000. Following the S&P 500 top the fall in NSE index was in sync with the S&P 500 fall at least for one months and then NSE started forming base from October 2001 to May 2003 while the S&P down fall continues till August 2002 and made a base between August 2002 to Mrch 2003 and then from My 2003 both S&P500 and the NSE index were in uptrend.

The 2008 subprime fall- S&P 500 made a top in November 2007 while the NSE index made a top in January 2008 and the down fall continues till march 2009. The NSE index started making base from October 2008 and continued till March 2009. The S&P 500 and the NSE index uptrend from 2009 onwards was in sync.

2011 sovereign debt crisis-The NSE index made a top in November 2010 and the down trend continues till December 2011, while 7 months later, the S&P 500 made a top in May 2011 and the down trend continues till October 2011. Following the top in S&P 500 index, the down trend NSE index and the S&P down trend was in sync for atleast 5 months.

The recent global growth concern of 2015 – The NSE index made a top in March 2015, while 4 months later the S&P 500 made a top in July 2015.

The down fall of 2000 and 2011, indicates that even though the S&P 500 made a top later by atleast 4 to 7 months, initially the NSE index down fall continued along with the S&P 500 down fall for atleast 1 month to 5 months time period, thereafter the NSE started forming base 5 to 6 months.

The up move of March-may 2003 and May 2009 of the NSE and S&P 500 index was nearly at the same time period.

Conclusion: As S&P 500 has just began its downward trend following the completion of 4 years of uptrend, this S&P 500 fall would weigh on the NSE index at least for one month and could extend up to 5 months of time period.

The NSE index down ward trend would be up to November 2015 to March 2016, target would be minimum 7400 and could extend to 7100 levels. Most likely post 7400 the NSE would start forming base between 7400 to 7100 levels.

NSE and S&P 500 a comparison: The NSE index is in pink and S&P 500 is in green and red

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