The markets started off on a somber note during the week with the Sensex losing nearly 820 points in the first 3 days. The fall was significant for two reasons. Firstly, such sharp falls are not seen in the midst of a pre-budget rally. Secondly, the fall in Sensex happened with a sharp spike in the VIX. Here is what actually drove the indices lower.
A worrying quarter
The results are coming in thick and fast and there were some real concerns in a number of heavyweights. HDFC bank and Kotak Bank reported larger than expected NPAs. TCS had growth issues and RIL saw GRMs and petchem margin falling. Of course, there were smaller banks like RBL which saw a sharp fall in profits but the macro worry appears to be that the consumption slowdown is beginning to hit the private banks. Now PSU banks will be closely watched.
Chinese virus spooks markets
Markets across Asia have been worried about the rapid spread of the Chinese corona virus. It has already resulted in over 40 deaths and affected lakhs. The last time such a pandemic hit Asia in the form of the SARS virus was in 2003. That had led to serious fall in demand and growth across Asia. With China central to Asian and global growth, the impact could be magnified this time around if the demand for goods really compresses in a significant manner.
Serious budget constraints
In the midst of the pre-budget euphoria that is common each year, the markets are worried about some larger macro challenges. Direct tax and GST revenues are expected to fall substantially short of target. The government is already hinting at an expansion of 50 bps in the fiscal deficit and that could impact the global ratings of Indian debt as well as the nature and color of FPI flows into India. The government has a lot of steep demands to contend with. There are expectations of personal income tax cuts after the government cut corporate taxes aggressively. That will be an additional cost to handle on top of Rs.145,000 crore for corporate tax cuts. These are the big budget concerns.
Valuation fatigue is real
There is real valuation fatigue in the market and it needs solid reasons to move up from these levels. The markets are close to its peak and so are the valuations compared to historical mean in the market. The assumption was that growth would catch up but there are hardly any signs. The growth downgrade by IMF to 4.8% underlines that the problem is more structural and less cyclical! Unless GDP growth picks up to above 6% and corporate top-lines also start showing growth, it will be really hard to justify current valuations. The fall in Sensex is largely reflective that there is a real problem on hand! ©