Reasons why Nifty is walking a tightrope

Publish Date: October 09, 2018

This is the second article of a four part series that focuses on how the markets will fare in the coming months.

It is a real-life cliffhanger facing the Nifty right now. In the first part of the series, we spoke about how 10,800 is a figure that would decide whether the Nifty would sink or float. (You can read the Here’s why you should keep your eyes glued to the Nifty this week to understand why we have conjured 10,800 as the magic figure)

But the question that arises is how did Nifty 50 find itself hanging by the wire?

Let’s look at the reasons why.

Spike before the storm

Until a few weeks back, the National Stock Exchange’s (NSE) benchmark index — Nifty 50 — was actually doing well. In fact, the Nifty 50 increased by more than 1,000 points in the last three months — it grew from 10,500 points to more than 11,500 in that period.

But the market rally — it is a sustained period of increase in prices of stocks — was mainly down to a handful of companies. It is important to note that not all company stocks contributed to this rally.

You may think that a market rally is always good for investors. But that’s not always true. There have been aberrations in the past.

This particular rally was one such outlier. The reason? It drove up Nifty valuations, meaning the value of stocks became very expensive and unsustainable.

The rally also increased the premium of MSCI India. When compared to the performance of other global emerging markets, MSCI India’s premium soared to an all-time high of 70%.

Related read: 5 things to know about MSCI India index

High premium reflects higher growth. But the flip side is that foreign investors — who use the MSCI India index to gauge the Indian stock market — see very little value in buying expensive stocks.

Loud thud

The rally spurred the value of stocks and pushed the premium even higher. But the euphoria was soon undone.

Soaring global crude oil prices, ravaging trade wars, rupee depreciation and widening current account deficit soon caught up with the emerging markets, including India’s.

Related read: Emerging markets have taken a beating. Here’s why

The result? A loud thud.

The Nifty-50 went into a tailspin. Even though only a few companies had benefitted from the market rally, the punishment was meted out to one and all. Majority of the companies in the Nifty suffered reverses in the market.

The mid caps and the small caps were the worst hit. They were anyways not doing well. But due to the sharp decline in stock markets, several of them are now trading very close to their historic lows.

Weaker against US dollar

The Nifty is actually down 25% in US dollar terms. The Nifty may be around 10,300 right now, but for a foreign investor trading in US dollars, the index is around 8,800.

What makes it worse is that MSCI India is still trading at 55% premium when compared to MSCI Emerging Markets. In short, there is very little value in the Indian market for foreign investors.

These are some of the reasons why foreign investors have pulled out more than Rs 93,000 crore from India’s equity and debt markets.

Further uncertainties

The trade war between the US and China shows no signs of abating.

No-one knows which direction the crude oil prices will move in in the coming months.

Right now, the crude oil prices are hovering around $84 per barrel. That’s not ideal for India. Anything above $70 per barrel is bad news because India is a major importer of oil. To surmise, the more expensive crude oil is, the higher the country’s import bill will be. As a result, the country’s current account deficit will balloon further.

Related read: What a high current account deficit means to investors

The US sanctions on Iran will be enforced from November 4. It means that India will face US ire if it decides to go ahead and buy oil from Iran. But then again, Iran allows India to buy its oil at a cheaper rate. This gains greater significance against the backdrop of rising global crude prices. But in the end, if New Delhi decides to abide by the US sanctions, the petrol prices would increase further, which would consequently affect the stock markets too.

Nifty is sweating over Indian politics too. As many as five states — Chhattisgarh, Madhya Pradesh, Rajasthan, Telangana and Mizoram — will go to polls in November and December. It is important to note that three of these states are ruled by the BJP. Any electoral reversal for BJP would cause further jitters in the market. That’s because Indian markets usually react well when the ruling party in New Delhi does well. The reason is simple: a unified party is more nimble. It is capable of announcing and framing new policies more quickly and is less afraid to take the tough decisions.

To sum up, global uncertainties, compounded by domestic politics, have forced the Nifty to perform a high-wire act. Right now, it would take more than the soothsayer in Julius Caesar to predict which way the Nifty will blow.

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