Articles

Indian markets: Caught in the trade war crossfire

Publish Date: 16th August, 2018

The Indian equity markets are at risk due to strengthening US dollar and a full-blown trade between Washington and Beijing.

The spike in the Dollar Index above 95 is likely to reduce the FPI (Foreign Portfolio Investors) inflow. That’s because the rupee underperformance against the dollar will stave off foreign investors from Indian markets.

It won’t be surprising if the Dollar Index — an measure of the US dollar’s strength compared to a basket of foreign currencies — touches the 100-mark and further affect the Indian exchanges.

Although SIP (systematic investment plans) inflow remains strong on the domestic front, it won’t be enough to offset the FPI dent.

The Indian rupee’s performance could get worse: if the Dollar Index touches 100, the Indian rupee will plunge to record-low levels of Rs 73-74 against the US currency, which would alarm foreign investors even further.

We had earlier estimated that the rupee wouldn’t touch the 70-mark against the US dollar. However, the contagion-risk in the merging market set off by Turkey’s Lira crisis and the trade war between China and the US has derailed our calculations.

Nifty: In a spot of bother

The Nifty will be able to withstand the global churn if it remains above the 200-day moving average (DMA), which is placed at 10,600. Falling below the 200-DMA would suggest that the market might turn bearish.

However, there are concerns that the Nifty-50 rally from 10,500 onwards has lacked depth. That’s because though the Nifty has risen 9% in rupee terms, it has slid 1% in dollar terms. Similarly, the midcap index is down 17% and the small cap index is down by 21% (both in dollar terms).

The Nifty rally has not been a team effort either. Five stocks — Reliance Industries, Infosys, TCS, HDFC Bank and ITC — led the Nifty rally by 800 points, while the top 10 contributing stocks accounted for 1,150 index points. This suggests that the record rally has been driven by the top-tier stocks. The other company stocks will need to contribute for the Nifty to hang on to the 10,600 mark.

There is a lack of interest among investors too. The deliverable percentage — the transfer of stock ownership — has slid to a four-year low from peak 45% to 33%, which does not augur well for Indian markets.

The top-heavy Nifty growth doesn’t seem sustainable. In fact, the Bloomberg consensus suggests that the overall earnings estimates for Nifty-50 has come down from 20% to 15%.

Further, the earnings estimates of the midcap index is now between 9% and 18%, down from 25% at the start of this financial year.

Emerging markets: Under pressure

The steep correction in Chinese market due to the hostile trade war with the US has roiled the emerging market stocks.

The MSCI Emerging Markets Index slumped by 20% on August 15 due to large-scale fresh selling, which can technically be considered as bear market.

The Kotak Institutional Equities (KIE) team believes that an escalation in trade war and post-facto tariffs can scuttle the Indian markets further.

Plus, if the US government imposes “hard” sanctions on Iran, it would harm India as its oil exports would become more expensive. A higher crude oil bill would worsen the Indian current account deficit (CAD) and GDP data.

In short, the continuing trade war can make a dent on the Indian stock markets.

The political uncertainty in India, given this is a pre-election year, is another potential sinkhole for Indian equities.

The problems don’t end there. This quarter’s earnings rally was largely due to last year’s low base set off by demonetization and GST. However, the low base effect will fade out and year-over-year comparisons will get tougher by next year, which will impact the Indian markets’ earnings performance in overall terms.

To sum up, the global trade war and next year’s elections in India have ensured that the Indian markets are gripped in the gauntlet of headwinds, at least for the time being.

(Note: The above note has been prepared based on inputs from media articles, Bloomberg and KIE strategy reports. This may or may not match with the views of groups companies.)

Also read

• How Turkish Lira slide impacts India
• Secure financial freedom for your family
• How US sanctions on Iran can impact India
• Our stock recommendations
• Our brokerage options