Sensex & Nifty Continue to Bleed amid Global Rout

Tue, 6 Feb Closing

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Indian share markets continued to plunge in today's trade amid sell-off in global market. Both Nifty and Sensex fell nearly 3.5%, their biggest fall since August 2015. Indian markets are already under pressure after the government presented budget that focused on populist measures ahead of general elections in 2019 and imposed a long-term capital gains tax on equities.

At the closing bell, the BSE Sensex closed lower by 561 points and the NSE Nifty finished lower by 168 points. The S&P BSE Mid Cap finished down by 1.7% while S&P BSE Small Cap finished down by 2.2%.

Losses were largely seen in consumer durables stocks, software stocks and pharma stocks.

Asian stock markets closed sharply lower following massive losses in Wall Street with shares in Hong Kong leading the region. The Hang Seng is down 5.02% while Japan's Nikkei 225 is off 4.73% and China's Shanghai Composite is lower by 3.35%. European markets too are lower today with shares in Germany off the most. The DAX is down 1.84% while London's FTSE 100 is off 1.58% and France's CAC 40 is lower by 1.45%.

The Dow Jones industrial average plunged by 1,175 points yesterday, its largest single-day points drop in history.

In the biggest global sell-off since 2016, financial markets from Asia to Europe to the United States were rocked primarily by concerns about inflation. The Dow was off a heart-stopping 1,600 points during afternoon trading, the largest intraday point decline in the blue-chip index's history.

The Dow's dive erased gains for the year so far and extended a multi-day slump that saw the Dow drop by some 600 point.

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.

Rupee was trading at Rs 64.27 against the US$ in the afternoon session. Oil prices were trading at US$ 63.73 at the time of writing.

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.

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 Warren Buffett Indicator Suggests Indian Equity Market Is Overvalued

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.

Aviation stocks finished on a positive note in today's trade. Jet Airways share price and Indigo share price finished up by 2.6% and 0.2% respectively on the BSE.

Driven by strong rates of economic and network expansion, India remained the world's fastest growing domestic aviation market for the third straight year in 2017. According to the global airlines body, International Air Transport Association (IATA), India's domestic aviation market grew at rate of 17.5% in 2017, beating China's 13.3% growth.

On the global front, the report said that revenue Passenger Kilometres (RPKs) rose by 7.6% in 2017, registering above-trend growth that was ahead of the ten-year average rate of 5.5%. It further added that since late 2014, lower airfares have helped in boosting passenger growth, which in 2017 was also supported by broad-based pick-up in global economic conditions.

However, the global airlines body expects slightly slower growth in 2018 as compared to the growth recorded in 2017, on the back of increases in airline input costs such as hike in fuel prices and labour costs in certain countries.

FMCG stocks plunged in today's trade with Archies Ltd share price and Lakshmi Overseas Industries share price leading the losses.

Emami share price finished up by 2.6% after it was reported that the company had concluded a deal to acquire a substantial minority stake in Brillare Science Pvt. Ltd, valuing the company at Rs 750 million-1 billion.

Brillare produces hair and skin care products, and sells them to professional salons. Emami currently does not sell through grooming salons but according to Brillare's director, the company may bring these products within its own distribution network to supply to premium outlets going ahead.

In early December, Emami announced it had agreed to acquire a 30% stake in another new consumer goods maker, Helios Lifestyle Pvt. Ltd, which sells upscale men's grooming products under The Man Company brand.

Meanwhile, Bitcoin dropped to its lowest in more than two months. The digital currency fell to a low of US$5,947.40, its lowest since mid-November. With that decline, bitcoin has now lost more than 50% for the year so far.

The latest sell-off follows reports in the last week that have raised worries about increased regulation, hackers and potential price manipulation at a major cryptocurrency exchange. On Friday, J.P. Morgan Chase, Bank of America and Citigroup also said they have decided to ban cryptocurrency purchases by their credit card customers.

In news from the economy, in line with the government's earlier promises, Finance Minister Arun Jaitley has said that the basic rate of corporate tax can be brought down to 25% from the current 30% only after all the exemptions given to the industry have ended.

He also said that it would not be proper to end exemptions midway as some industries may have been set up based on them.

In the Union Budget 2018-19, Jaitley announced that corporate tax would be reduced to 25% from the coming fiscal for companies which had a turnover up to Rs 2.5 billion during 2016-17. He said that for the remaining 7,000-odd companies, the average effective tax rate after considering the exemptions comes to about 22%.

Talking about fiscal deficit, he said that the target of trimming it down to 3.2% of the gross domestic product (GDP) in the fiscal year ending March 2018, was missed mainly due to goods and services tax (GST) revenues accruing only for 11 months as against the expenditure being accounted for 12 months.

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