Euro zone concerns, weak rupee and policy inaction weigh on investors’ sentiments

With the benchmark indices declining more than 10 per cent from the highs reached in February, a December-like pessimism seems to have returned to the markets.

As in late 2011, a fall in global risk sentiment on the back of renewed euro zone concerns and a weak domestic currency have taken a huge toll on the equity markets.

The benchmark Sensex has dropped over 2,000 points, or 11 per cent from 18,428.61, touched on February 21. The 30-stock index on Thursday ended 59.53 points lower at 16,420.05, its lowest close since January 16, while the Nifty closed at 4,965.7, down 9.1 per cent. (Click here for chart)

Since February 21, of the 30 Sensex stocks, 25 have given negative returns, with nine falling more than 20 per cent. The Sensex had run up 21 per cent between December 20 and February 21. It had seen a fall of nearly 16 per cent from 17,804.8 to 15,175.08 between October 28 and December 20. Foreign investors had pulled out close to Rs 4,500 crore from the Indian markets during this period.

“The prevailing sentiment on Indian equities seems to be returning to the uber-bearishness of late 2011, as the liquidity-fuelled rally of January and February loses momentum,” said Nick Paulson-Ellis, country head (India), Espirito Santo.

“The mood among investors is definitely down with the euro zone problems resurfacing and not much happening on the reforms front in India,” Andrew Holland , chief executive officer, (investment advisory), Ambit Capital.

The tally of investments made by foreign institutional investors (FIIs) in Indian shares so far this calendar year is over Rs 40,000 crore. Since March, they have sold shares worth nearly Rs 2,000 crore due to the worsening macroeconomic conditions and the controversial General Anti-Avoidance Rule (GAAR).

“The rupee depreciation and slowdown in FII investments are the biggest worries for the Indian markets,” said Motilal Oswal, chairman & managing director, Motilal Oswal Financial Services. The domestic currency has declined more than nine per cent from the high of 48.69 against the greenback, reached in February. Oswal, however, believes the market mood appears more bearish than what it actually is, as a fall in activity levels is creating huge volatility. On the bright side, experts believe the current pessimism presents a good buying opportunity.

“Despite the weak sentiment, there are some positives to support the market like falling crude oil prices and deferment of GAAR,” said Holland. Finance Minister Pranab Mukherjee on Monday postponed the implementation of GAAR by a year.

From here on, political push for reforms, drop in oil prices below $100 per barrel and improvement in corporate earnings could be positive triggers for the market, Oswal said.

As a sign of market players turning cautious in their outlook, many strategists at foreign brokerages are recommending clients to reduce risk in their portfolio. Three leading foreign firms — Nomura, Deutsche Bank and UBS have recommended their clients to go overweight on sectors such as FMCG and pharmaceuticals.

Paulson-Ellis believes even thought India’s fundamentals won’t improve in a hurry, there are still good investment opportunities in defensive sectors and financials.

Source: Business Standard

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