Sensex Ends 770 Points Lower; Metal and Energy Stocks Witness Selling

Tue, 3 Sep Closing

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Indian share markets fell sharply during closing hours, tracking weak domestic and global cues. The BSE Sensex fell over 850 points intraday and breached the 36,500 mark. Meanwhile, NSE Nifty slumped below 11,800.

All sectoral indices ended on a negative note, with stocks in the metal sector, consumer durables sector and energy sector, leading the losses.

At the closing bell, the BSE Sensex stood lower by 770 points (down 2.1%) and the NSE Nifty closed down by 225 points (down 2%). The BSE Mid Cap index ended the day down 1.7%, while the BSE Small Cap index ended the day down by 1.3%.

Asian stock markets were also weak today hurt by US-China trade frictions. The United States on Sunday began imposing 15% tariffs on a variety of Chinese goods, and China began imposing new duties on US crude oil.

As of the most recent closing prices, the Hang Seng was down 0.4% and the Shanghai Composite was up by 0.2%.

The rupee was trading at 72.33 to the US$ at the time of writing.

In the news from the banking sector, public sector bank (PSB) stocks led by Punjab National Bank (PNB) and Corporation Bank, witnessed sharp selling pressure today after the government announced the merger of ten state-run lenders into four.

Note that in order to revive the deepening economic slowdown, the government on Friday unveiled a mega plan to merge 10 public sector banks into four with a view to create fewer and stronger global-sized lenders with robust balance sheets that can be used to boost credit and spur growth.

Oriental Bank of Commerce and United Bank will merge with Punjab National Bank to create the nation's second-largest lender behind State Bank of India. Also, Syndicate Bank will merge with Canara Bank while Andhra Bank and Corporation Bank would subsume into Union Bank of India. Allahabad Bank will be amalgamated with Indian Bank.

The above mergers, together with two set consolidations done last year, will reduce the number of public sector banks to 12 from 27 in 2017.

Needless to say, most investors would be worried about the level of NPAs and current and savings accounts (CASA) of the merged entities.

Lower NPA ratio and sustenance of high CASA, in the future, could signal the banks' fitness levels to lend more.

India's Top 6 Public Sector Banks Are Getting Fitter

Here's what Tanushree Banerjee wrote about the above development in today's edition of The 5 Minute WrapUp...

• But what could go unnoticed is the efficiency potential of the merged entities.
  
  Post merger, the employee per branch ratio of the consolidated PSU entities could be in the range of 7 to 9 per branch. This would be almost half that of their private sector counterparts like HDFC Bank and Kotak Bank.
  
  Leaner operations would mean use of technology to support growth.
  
  So, I would not be surprised if the PSU entities leverage technology at a much bigger scale than their private sector peers, in a few years.

In the news from the commodity sector, gold was witnessing buying interest today. Prices remained near record-highs in Indian markets today.

Gains were seen as a sharp fall in rupee against the US dollar pushed the demand for yellow-metal higher.

Prices of gold and silver contracts had surged 1% and 2% respectively on Monday amid a global uptick. Also, gold futures had hit a fresh life-time high of Rs 39,425 last week.

Note that globally, gold prices are up around 20% so far this year amid inflows into gold-backed assets. US-China trade war, volatility in risk assets like equities, and central banks signaling a looser monetary policy have boosted the safe-haven appeal of gold.

As per a Bloomberg report, inflows into gold-backed exchange traded funds (ETFs) topped 100 tons in August, the highest since February 2013. Holdings rose 101.9 tons, bringing total known assets to 2,453.4 tons, the third straight monthly increase after the addition of a combined 154.1 tons in June and July.

For domestic markets, jewelers hope that upcoming festive season will improve gold demand, which has been hurt due to high prices.

As many central banks diversify their portfolio, they are adding gold as global growth slows and trade and geopolitical tensions rise.

Also, speaking of gold, co-head of research, Tanushree Banerjee shares some interesting information on the Sensex to Gold (per 10 grams) ratio going back 15 years.

Here's what she wrote about it in one of the editions of The 5 Minute WrapUp...

• While the ratio has been quite volatile, the average ratio turns out to be 1.
  
  In other words, whenever the Sensex has risen at a much faster pace than gold prices, its fall has also been equally precipitous. The reason behind this volatility is not hard to find.
  
  Stock markets are more amenable to manipulation than gold prices are.
  
  Thus, if the Sensex to gold price ratio is way more than one, it could be a signal the Sensex is overvalued.
  
  Alternatively, if it is way below one, it could mean that Sensex is undervalued.
  
  The ratio stands at around 1.09 currently, indicating that the Sensex is trading pretty close to its fair value!

Thus, even though the market correction seems overdone in mid and smallcaps, the bluechips, particularly those in the Sensex, aren't undervalued yet.

To know what's moving the Indian stock markets today, check out the most recent share market updates here.

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