Sensex Tanks 460 Points amid Global Correction; Bank & Pharma Stocks Lead the Losses

Fri, 9 Feb 09:30 am

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Asian stock markets fell sharply following a severe rout in the U.S. markets. The Nikkei 225 is off 2.69% while the Hang Seng is down 3.11%. The Shanghai Composite is trading down by 4.1%.

Wall Street finished its toughest week in more than two years after fears of higher interest rates led to a fresh plunge in New York stocks.

Another day of wild swings in the financial markets saw more than 1,000 points wiped off the Dow Jones industrial average - a loss for the day of over 4%. It was the third drop of more than 500 points for the Dow in the last five days and the Dow is now down 10% from its peak on 26 January.

The sharp selloff in recent days was kicked off by concerns over rising inflation and bond yields, sparked by last Friday's January US jobs report.

While market fear may not be based in any change in economic fundamentals, in its last meeting under chair Yellen, the Federal Reserve indicated it expects inflation pressures to increase through the year.

According to projections released in December, officials expect three rate hikes in 2018 - so long as market conditions remain broadly as they are - but some economists believe the central bank could add another increase at its final meeting of the year.

Meanwhile, Indian share markets too have opened the day deep in red. BSE Sensex is trading lower by 461 points and NSE Nifty is trading lower by 147 points. S&P BSE Mid Cap is trading lower by 0.8% and S&P BSE Small Cap is trading down by 1%.

Losses are largely seen in bank stocks, FMCG stocks and pharma stocks. The rupee is trading at Rs 64.16 against the US$.

The Market cap to GDP ratio for Indian companies is close to dangerously high levels. While this is still some way off the peak of FY-08, when it had once reached close to 150, it's relatively high.

FY17 saw this ratio reach close to 80. It is also expected to increase further given the moderate growth expectations in India's GDP for FY18. Warren Buffett once considered this as one of the best valuation metrics to gauge the markets.

The Warren Buffett Indicator Suggests Indian Equity Market Is Overvalued

Past history shows some correlation between the ratio and the share market. 2008 saw Sensex decline by 38%, when this ratio crossed the 100 mark. Also, the market has bounced back sharply when this ratio was low.

The basic assumption in this ratio is that whenever the GDP of the country grows, the market performance will reflect it. Also, when stocks do well, it can be extrapolated to assume the Indian economy is doing well.

Bank stocks opened the day on a weak note with ICICI Bank share price and Axis Bank share price leading the losses.

HDFC Bank became the latest to raise some rates by 10 basis points. The same day, the Reserve Bank of India (RBI) kept its policy rate unchanged.

As per an article in The Livemint, other major banks are likely to follow suit, raising concerns of de facto rate increases in an economy that is growing at its slowest pace in three years and needs private investment.

Banks are facing a number of threats. Chief among them is that rising inflation has hurt bonds, driving benchmark 10-year yields up more than 100 bps since July, a big concern for banks, which are the biggest buyers of the debt.

Banks are also facing a higher cost of funds, a key expense for the lenders, and more stringent regulatory requirements for their liquidity coverage ratios. Banks are also being forced to raise deposit rates so they can attract more funds, and they continue to set aside more capital as they clear a near-record US$147 billion in soured debt.

In another development, Yes Bank has successfully completed issuance of its first US$ 600 million (more than Rs. 38.47 billion) bond issue in the international debt markets. The Bond issuance is for a tenor of 5 years and is rated Baa3 by Moody's Investors Service and is listed on the London Stock Exchange International Securities Market (LSE ISM), the Singapore Exchange Securities Trading (SGX), and the India International Exchange IFSC at GIFT City, Gandhinagar.

This is the largest debut International bond issuance by an Indian bank with a lowest spread over Treasury for a debut fixed rate, issued as a part of the Bank's US$ 1 billion Medium Term Note (MTN) program.

Yes Bank share price opened the trading down by 1.4%.

In news from steel sector, Steel Authority of India Ltd (SAIL) posted a profit for the three months ended December on Thursday, snapping ten straight quarters of losses.

Net profit was Rs. 430 million (US$6.72 million), compared with a loss of Rs. 7.95 billion in the year-ago period. Quarterly revenue from operations rose 21.4% to Rs. 153.24 billion.

SAIL share price opened the trading day up by 6%.

In another development, JSW steel has emerged as the favorite to bag  HYPERLINK "https://www.equitymaster.com/share-price/BHSN/BHUSANSTL-500055/BHUSHAN-STEEL-Share-Price?utm_source=TM&utm_medium=website&utm_campaign=MCOM&utm_content=market-commentary" \t "_blank" Bhushan Steel. Other bidders included Tata Steel and a consortium consisting of employees of  HYPERLINK "https://www.equitymaster.com/share-price/BHSN/BHUSANSTL-500055/BHUSHAN-STEEL-Share-Price?utm_source=TM&utm_medium=website&utm_campaign=MCOM&utm_content=market-commentary" \t "_blank" Bhushan Steel.

As per the reports, JSW Steel has put in a bid of Rs 297 billion. This includes Rs 280 billion upfront cash and Rs 17 billion as equity to the banks.

Tata Steel and JSW Steel are trying to strengthen their hold on the market by acquiring steel assets undergoing insolvency resolution and keep out potential rivals. Tata Steel has a domestic steel capacity of 13 million tonnes per annum (mtpa) and JSW Steel 18mtpa.

Meanwhile, global metal major ArcelorMittal is speeding up the sale of its stake in bankrupt  HYPERLINK "https://www.equitymaster.com/share-price/UTMS/UTTAMSTL-513216/UTTAM-GALVA-STEEL-Share-Price?utm_source=TM&utm_medium=website&utm_campaign=MCOM&utm_content=market-commentary" \t "_blank" Uttam Galva Steel to make it eligible to bid for Bhushan Steel. Currently, the Insolvency and Bankruptcy Code does not allow promoters of defaulting companies to bid for a stressed asset.

Tata Steel share price too opened on a positive note (up 1.2%) on the BSE.

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