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Informist, Monday, Aug 5, 2024

By Noel John

MUMBAI – Mirroring their global counterparts, headline domestic equity indices ended sharply lower today as woes of a likely recession in the US, an unwinding of yen carry trades, and uncertainties in West Asia weighed on them, analysts said. Both the Nifty 50 and the Sensex fell to their lowest levels in over a month today. 

Benchmark indices also saw their biggest intraday fall of 3.3% each since the Lok Sabha election results on Jun 4, when they fell over 8%. The Nifty 50 and the Sensex ended 2.7% lower each at 24055.60 points and 78759.40 points, respectively. The nervousness was evident from the surge in the fear gauge, India VIX, which rose over 50% during the day, the highest intraday rise in about nine years. It closed over 42% higher at 20.3675.

Equity indices across the globe were sharply lower today, with Japan's Nikkei 225 falling over 13% and erasing all gains accrued so far in 2024. "The end of Japan's carry trade, where investors borrow at low rates to invest in higher-yielding assets, is a key concern. As central banks tighten monetary policies, borrowing costs increase, causing a shift away from riskier assets," said Sharad Chandra Shukla, director of Mehta Equities, in a note today. The Bank of Japan raised the policy rate to around 0.25% from a range of 0% to 0.1% on Wednesday, which also pushed the value of the yen against the US dollar higher. This prompted investors to unwind their carry trades to cut losses. 

While Japanese rates are expected to rise, the rest of the world is expected to cut interest rates, which disrupts the reflexive strategies that market participants have relied on for nearly three decades, Vikas V. Gupta, chief executive officer and chief investment strategist at OmniScience Capital, said in a note today. "Both seasoned investors and newcomers are grappling with this new reality, likely leading to the unwinding of the famous yen carry trade. The sharp decline in the Nikkei index reflects this adjustment," Gupta said. 

In the US, equity indices extended losses on Friday after the July jobs data showed a weakening job market, which triggered concerns about a likely recession in the country. There was market chatter today that the US Federal Reserve called for an emergency meeting following the equity market crash in Japan. Following this, the probability of a 50-basis-point rate cut in the September meeting of the US Federal Reserve rose to 93.5% during the day from 73.5% at pre-open today, according to CME FedWatch Tool.

The US Fed has to cut interest rates by 25-50 basis points, if not today, then by at least September, a head of research at a domestic brokerage said. However, equity markets in the US will take it as a negative cue and could extend losses, as this could be seen as a sign that even the Fed acknowledges that the country is slipping into a recession, he said. Indian equity markets could see an impact if the US market extended losses due to a sentimental reaction, but as long as our fundamentals remain strong, the losses will be limited, he added. 

"The combination of 7% GDP growth and 15% Nifty earnings CAGR (compound annual growth rate) in FY24-26, stable currency, moderating inflation, and buoyant retail participation may keep sentiments strong," Motilal Oswal Financial Services, said in a strategy report today. However, valuations appear fair for the Nifty 50, but expensive for mid- and small-cap indices, the brokerage said.

The corporate earnings for Apr-Jun have so far been in line with expectations, with growth primarily driven by the banking, financial services, and insurance and automobile sectors, Motilal Oswal Financial Services said in a report today. 

Earnings of 39 companies out of the Nifty 50 index that has declared results so far grew 5% on year, against the expectation of a 2% rise, fuelled by HDFC Bank, Tata Motors, ICICI Bank, Maruti Suzuki, and Tata Consultancy Services, the brokerage said.

"I don't expect the second half of the year to be as smooth in terms of market returns. Investors must brace for more volatility and churn," Taher Badshah, chief investment officer at Invesco Mutual Fund told CNBC-TV 18 today. He said the developments in the US and Japan are concerning, but the corporate earnings in India are relatively stable, as per a CNBC-TV 18 post on social media platform X, formerly known as Twitter. 

On the sectoral front, shares of financial services, automobile and metal companies were the worst performers in the market today. The Nifty Metal index ended 4.9% lower today, becoming the worst-performing sectoral index. The sector has been impacted as it is considered riskier in comparison, Tushar Chaudhari, lead research analyst at Prabhudas Lilladher, said. Falling steel prices and weak exports are also dampening the sentiment towards the sector, he said.

Bucking the trend, shares of select fast-moving consumer goods and pharmaceutical companies gained amid the broad-based sell-off today. Since these sectors are defensive, investors are taking money out of metals and information technology stocks and parking into FMCG stocks, Anshul Jain, head of research at Lakshmishree Investment & Securities, said. 

Shares of pharmaceutical companies such as Dr. Lal Pathlabs, Alkem Laboratories, Glenmark Life Sciences and Vijaya Diagnostic Centre were among the major gainers today. "The management of several pharma companies has assured investors that they are not facing major challenges amid the current geopolitical tensions. We concur with this view, considering that the majority of large pharma companies have significant exposure to the European and US markets, both of which are poised for substantial growth," a research analyst with a domestic brokerage said. 

The broader market indices also mirrored the sharp losses in the overall market, with the Nifty Smallcap 100 closing 4.6% lower. "Small-cap stocks have deeper and longer drawdowns when compared to large-cap stocks. Markets move in cycles, so one needs to give their portfolio enough time to live through the bad phase and give rewards in the good phase," Capitalmind Financial Services, said in a report today. 

Now, all eyes will be on the Reserve Bank of India's three-day Monetary Policy Committee meeting, starting Tuesday. Investors will closely look for cues on when the central bank will cut key interest rates. RBI Governor Shaktikanta Das has, on multiple occasions, said that it was premature to talk about rate cuts with inflation at around 5% compared with the medium-term target of 4%.

* Of the Nifty 50 stocks, 4 rose and 46 fell

* Of the Sensex stocks, 2 rose and 28 fell

* On the NSE, 331 stocks rose, 2,451 fell, and 74 were unchanged

* On the BSE, 664 stocks rose, 3,414 fell, and 111 were unchanged

* Nifty Metal: down 4.9%; Nifty Media: down 4.6%; Nifty Realty: up 4.3%

BSE                                              NSE
Sensex: 78759.40, down 2222.55 pts or 2.7%       Nifty 50: 24055.60, down 662.10 pts or 2.7%

End

Edited by Saji George Titus

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