Market mayhem: Points to ponder

Sheen is off Indian equities

In its biggest fall in six-and-a-half years, the Sensex plunged over 1,600 points on Monday, losing nearly six per cent of its value.

The Indian markets were part of a global phenomenon, in which markets across the world responded to turmoil in China, where the Shanghai Composite ended 8.5 per cent lower.

But it is worth noting that the Indian indices fell more than those of most other emerging markets -- more even than the Hang Seng in Hong Kong.

Clearly, investors are worried that stress would be experienced in specific areas.

Growth may taper if overseas investment dries up; companies with overseas debt will struggle with rupee depreciation; falling share prices will hurt disinvestment and the fiscal situation.

On the first point, an aversion to 'risky' emerging market assets is noticeable, as money heads back to the safe havens of US Treasuries and German bonds. Emerging market currencies saw sustained selling; the rupee dropped to levels last seen in late 2013.

Commodities hit new multi-year lows.

Finance Minister Arun Jaitley and Reserve Bank of India Governor Raghuram Rajan felt the need to make reassuring statements.

Dr Rajan said the RBI possesses ample reserves to control rupee volatility; Mr Jaitley said the turmoil was transient in nature and Indian markets would soon settle down.

Unlike in 2013, the macroeconomic fundamentals are strong, thanks to cheaper oil.

Growth should remain reasonable and inflation continues to moderate.

The current account deficit is just about 1.3 per cent of gross domestic product or GDP, and foreign exchange reserves cover eight to nine months of imports. And given that crude oil, coal and gas prices are still falling, imports should not rise in dollar terms.

But there is fear of export compression. Global demand is low, and exports have fallen for the last eight months.

The falling rupee may help maintain export competitiveness, although it reduces the beneficial impact of lower dollar-denominated fuel prices.

But in the medium term, Indian companies with external commercial borrowings could face stress.

About 30 per cent of India’s external obligations consist of corporate debt, the majority of which exposure is unhedged.

Those with unhedged external debt and rupee earnings will find it hard to cope if depreciation continues.

Meanwhile, the sheen is off Indian equities.

Clearly, Indian markets are not the exception to global or emerging-market trends that they were being touted as.

The Sensex is down nearly 10 per cent in the past fortnight.

Foreign portfolio investors, once bullish on India, have been heavy sellers through August. Unfortunately, falling equity values will also impact the government’s disinvestment programme.

The sale of a 10 per cent stake in Indian Oil Corporation squeaked through, even though the stock closed at Rs 376, well below the offer floor price at Rs 387.

The retail portion was undersubscribed.

But the total disinvestment target of Rs 69,500 crore (Rs 695 billion) for this financial year now looks very ambitious.

There are several scheduled initial public offers, including Hindustan Aeronautics and Rashtriya Ispat Nigam, and multiple offers for sale planned in listed PSUs such as NTPC, NHPC, Coal India, Bhel and ONGC. Perhaps the government left it too late, again.

The turmoil may not be over, especially if China is headed for a very hard landing.

The stock market bubble has burst; the real estate bubble is on the verge of bursting; indebted construction firms and municipalities across China may be on the edge of default.

Until Beijing’s policymakers succeed in restoring confidence about the growth trajectory of the world’s second-largest economy, investors everywhere will remain on tenterhooks.