The BSE Sensex dropped sharply since the talk of tapering started on May 22 and the fall was exacerbated by the slide in the rupee. Then a relief rally swept through after the Fed postponed tapering of its stimulus and as the rupee recovered dramatically. Despite all the twists and turns, markets have hardly moved year-to-date (2%). But now, analysts are predicting a definite downside for stocks, with domestic brokerage Religare Capital predicting a 15% fall in the Sensex by March 2014.
Here are five reasons why markets are poised for a big fall
- Economic growth has slowed down: India's GDP growth has come down from 9 per cent to 4.5 per cent in a matter of 2-3 years during which Indian stock markets have largely been range bound. Dr Tirthankar Patnaik of Religare Capital told NDTV that, "Yields are very high, markets are poising too much optimism and liquidity and this is a combustible situation." According to Religare Capital, the BSE Sensex could fall to 17,000 from a 12-times earnings point of view in March 2014. This means the 50-share Nifty could go down to 5,000-4,900 levels by March. (Watch the interview)
- Goodwill of foreigners should not be taken for granted: It would not be wrong to say that Indian stock markets dance to the tune of foreign investors. And every government tries hard to pitch India as an attractive market when it comes to foreign investment. But, as growth stutters, there's little incentive for foreigners to invest in Indian equities. What's more, the sharp fall in the rupee, erodes profitability of investments made in dollars. Sanjeev Prasad of Kotak Equities told NDTV that over the last 3-5 years, in dollar terms, people have lost money in India. "At some point of time, if we don't get our act right, overseas investors who have been very generous towards India... these people may start questioning and say hey what we are getting out of India," Mr Prasad said. (Watch)
- Government spending remains a concern: There are several reasons to worry about India, but the biggest issue is the fiscal position, which is pretty grim, Mr Prasad said. The government has maintained that it would restrict the fiscal deficit to 4.8 per cent of GDP in the current fiscal, but worries on the fiscal front are rising as elections near. Any slippage may lead to a sovereign ratings downgrade, which would be catastrophic in terms of sentiments and liquidity.
- Rupee not out of woods yet: The rupee has made a dramatic recovery in the last four weeks, but it is still trading above 62 per dollar. The current account and balance of payment situation looks comfortable as of now but things might go wrong. Mr Prasad says, the only reason why India's trade deficit has been comfortable over the last few months is because of low gold imports, which may shoot up in the festive season. We have not addressed the underlying issues and in that context markets are pretty expensive, he added.
- Stocks are very expensive: Markets are hardly reflective of what's happening on the ground, Mr Prasad says. Consumer staples are trading at 35-times FY14 earnings, while pharma names are trading at 18-22-times FY15 earnings. Even blue chips like HUL and HDFC are not safe bets, Mr Prasad says. HUL is trading at 37-times FY15 earnings despite single digit volume growth for the last many quarters.