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Why the Indian Markets are Tanking?

Editor, TRANSFIN
Nov 24, 2021 6:29 AM 5 min read
Editorial

The Indian markets experienced a murky Monday after continuing their declines for a fifth consecutive session.

Earlier today, the Sensex touched a low of 57,718 (albeit recovered by the day's end). Yesterday, the indices witnessed their biggest one-day loss in seven months. In fact, the Sensex has been on the decline every single day since November 15th, barring today.

The last few months have been particularly exuberant for the Indian equity markets. The onset of a post-pandemic economic recovery fuelled by a demand pull, investor enthusiasm and rising liquidity had led to a growth sprint that was cemented by the 60K-high attained in October. 

But now there's a break in that sprint. What caused it and why?

Let's see.

The End of the Aramco Affair

The $15bn-valued deal-that-was came to a formal end yesterday and erased close to $9bn in market cap for RIL. The company's share price, which dwindled by over 4%, weighed heavily on the broader investor sentiment.  

It's one thing for the market to be impacted by a boardroom setback. And another thing to expect a setback with a deal that was "done". Saudi Aramco's stake purchase in RIL's O2C business was the result of a long-meditated and structured initiative (with "100% probability" of success as per some). If there was anything uncertain about the deal, it was only with regard to its fine print, that is, what form it may take (all cash or cash+stock). 

Although why the deal fell through hasn't been stated officially, there are quite a few guesses. One could be RIL's recent pivot towards renewables (more on that here). Trying to establish oneself as a beacon of sustainable energy use is difficult if one is in bed with the largest oil company in the world, an increasingly climate-conscious world, that is

Another could be the foreseeability of limited impact to RIL (perhaps even gain to some extent) by the impact of the fallout. Cancellation of the deal, evidently, has no bearing on RIL's balance sheet since the company has already deleveraged (debt-positive) itself. So, essentially, impact from the divorce is limited and if there was an ideal time to get out, it was now. 

The Paytm Payback (or Lack Thereof)

On November 18th, the country watched with bated breath, followed by despair, as its biggest-ever IPO listed on the markets. The failure of Paytm's much-hyped $2.5bn stock debut drew reactions like "subdued listing", "weak trading" and "a big sentimental setback". 

After a stunning two-day plunge (by close to 40%) that embittered millions of retail investors, it now casts a shadow on the future of other tech IPOs in India, something that was unseen in light of the rise in startup IPO push in the country lately. 

The occurrence of a wobbly Paytm IPO and a multibillion dollar deal fallout back-to-back created a cocktail of chaos for domestic public markets within five business days. 

But that isn't all that's unnerving the markets. 

The surprise step back in the Government's reform agenda with the repeal of the controversial Farm Laws also contributed to the ongoing losses. The PSU banking index was amongst the biggest losers on Monday with as much as a 5% decline. 

Although the value share of agriculture on equity indices is limited, the continuing protests had the most radical effect in influencing the market at large. In fact, the withdrawal of the Farm Laws could affect sourcing and expansion plans of companies who had hoped to benefit from their enactment, particularly in the food-processing and agro-logistics sector.

Apart from that, these are some of the other domestic and international factors that are creating the perfect storm which is spooking the markets:

  • The RBI's warnings on "stretched valuations" - After what was touted as a roaring run of the bull markets recently, the RBI's economists have cautioned that even though equity markets are performing healthily, many companies' valuations have outstripped their financial indicators.
  • Risk of rising inflation - With commodity prices reaching new highs in the developed world, the possibility of inflation turning "sticky", as opposed to "transitory", has resurfaced. This, in part, has begun denting stock market sentiments across the globe.
  • The ongoing global chip shortage - This phenomenon has been weighing heavily on auto stocks especially for a while now. Indian automakers like Maruti have been impacted the most with production declines that eventually translate into fall in share dominance too.

And then there is the most notable culprit of all - the pandemic that still is! With Europe experiencing a Fourth Wave of COVID-19 cases, re-imposition of lockdowns in many parts and sluggish vaccination numbers around the world, the investor apprehensions are set to continue, along with the dip in the markets.


What Lies Ahead?

If analysts are to be believed, the market seems to have entered into a "consolidation phase", which is essentially a precursor to a full-blown correction. Signs of volatility remain ahead (India VIX at 18.01) with momentum in selling pressures expected to continue.

But the decline has brought a few realisations to the fore. Starting with Paytm's listing debacle and the stretched valuations in domestic equity, lessons in investing lie aplenty for the exuberant newbie investors. With a loss of as much as ₹7.86Lcr ($105.7bn) in equity wealth in a single day, the stock market bleeding is possibly an indication of the reins being pulled in on a post-pandemic recovery run. 

Some also believe that the recent declines have brought in "the first meaningful correction" in a progressively bull market. It's a sign that the liquidity-driven market that has propelled stock growth lately may take a backseat in the coming months and investors could start focusing on the quality aspect of companies rather than buying into slapdash gains. 

Regardless, if the broad domestic economic fundamentals remain intact then the markets will keep rising in the medium-to-long term, even after facing intermittent selling pressures. With domestic recovery largely on-track, vaccinations continuing at a tolerable pace and FIIs (foreign investments, at large) into equities remaining robust, the Indian market could be expected to recover in the long run, discounting any macro tailwinds in the global markets.

FIN.
 

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