Markets Crack

Is it temporary, or is there a deeper market issue?

The Nifty and the Sensex lost close to 3.5% during the week. The real matter of worry was that on each of these days there was absolute lack of buying support at lower levels. Of course, there have been concerns over valuations for quite some time and at the level of 10,000, the Nifty was bound to show some profit taking. But the real worry is whether this is an indication of larger things to come.

There are geopolitical issues… 

The big worry is that there are serious geopolitical issues on Indian borders and elsewhere in Asia. Trouble has been simmering in Asia and Middle East for quite some time now; it is just that it has worsened. The Doklam stand-off near Sikkim has escalated with constant calls to war by the Chinese media. North Korea continues to persist with its nuclear program and now even threatens key US installations. The problems in Syria and Iraq are far from over. It is this continued atmosphere of uncertainty that is actually spooking the market. It is hard to say how much of truth there is in any of these events but markets automatically get cautious at such elevated levels. Both Doklam and North Korea are events that have the potential to deteriorate quite rapidly. Both have the potential to get major player like Russia, China and the US involved in an internecine war. That is exactly the worry. Indian economy can ill-afford a prolonged stand-off!

Concerns on valuations… 

To be fair, there have also been concerns on valuations. In P/E terms or even in P/BV terms, the Indian economy is nowhere close to the peaks of 2008 or 2010. In fact, the forward P/E is closer to the long-term average. Additionally, the dividends of cheap oil are still accruing to India and the turnaround in the earnings cycle is to begin. The concerns, therefore, are not so much about value metrics. The concerns are more with respect to disruptions to growth which could back-end the cycle of earnings reversal.

It’s just about the shell story…

To a large extent, the market correction appears to be a knee-jerk reaction to the recent SEBI clampdown on shell companies. The regulator had debarred a large number of alleged shell companies from trading in the markets. It included some marquee names that also boasted of high profile investors and institutional shareholders. The SEBI clampdown led to aggressive selling in most of these counters even as margin positions were forced to unwind and pledged holdings were offloaded in the market. This cycle appears to be bottoming out around the Nifty levels of 9700. Domestic flows continue to be robust and that should hold the markets up. It appears to be more of a one-off cooling. Once the dust settles, the market uptrend should resume! ©

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