Why did Nifty crack?  Remember, a rich market always keeps stumbling…

After almost getting within striking distance of their all-time highs, the Nifty and Sensex fell vertically over the last 3 trading days of the week. Why exactly did they fall so rapidly and what were the triggers? There are 4 such triggers!

It is all about the ETFs…

Exchange Traded Funds (ETFs) are powerful global passive investors. Passive in the sense, they don’t bother about outperforming stocks, and specific stock performances. They just buy the index if they like a particular market. Since the beginning of March 2015, over 85% of the money that came in was in the form of passive ETF money. Just as the ETF buys all stocks in the index in the ratio, it does the same when selling. These ETFs are typically driven by news and valuations. Not surprisingly, they hit the 2 high/PE sectors viz. Pharma and Technology. To combine with rich valuations there was cross currency risk.

Global growth is not great…

The US has been facing a slowdown in industrial production as well as in consumer demand. The big worry has been China. You don’t expect Chinese exports and imports to contract 15%; but that is exactly what happened. It is now clear that China will not grow at 8% but only at around 6%, with serious implications for global demand, commodity prices and global capital cycles. That is not good news.
Uncertainty in Europe…

Greece is the centre of global attention. If Greece defaults in the coming weeks, as it is most likely to, the consequences could be huge. Firstly, Greece may be either ejected or may automatically opt out of the Euro. It would be interesting to see how other PIGS nations like Spain, Italy and Portugal will react. If the weaker nations exit, the Euro could start to strengthen, with huge negative implications for exporting giants like Germany. But above all, the implications could be really felt in the financial markets as billions of Greek debt may come up for default. That is hanging like a miasma over global markets.

Valuations make it vulnerable…

That is probably the crux of the issue. With the market P/E at over 21, the room for error and skepticism is very limited. India will be the only growth story in the coming years; and that is the good news. But the current valuations are rich and any downsides to growth or inflation may damage the story. It is hardly surprising that the richly valued IT and pharmaceutical stocks are the worst hit on the Nifty.

As for the investors, the moral of the story may be to keep churning stocks that are richly valued. As long as the growth happens, markets will stay buoyant. But pressure points are beginning to show up gradually! ©

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