are expected to remain choppy as investors adjust their asset allocations amid rising interest rates. The 10-year US Treasury note — a key indicator for inflation and interest rates — has climbed by almost 50 basis points to nearly 2.9 per cent, the most in four years. Investors fear rising bond yields will prompt the US Federal Reserve to aggressively raise interest rates. This could shrink the liquidity that has splashed around emerging markets
like India in the past few years.
Compiled by BS Research Bureau; Sources: Bloomberg, Exchange
“Hardening of bond yields globally is one of the key factors driving the market correction,” said Gautam Duggad, head of research (institutional equities), Motilal Oswal Financial Services. “Inflation may make a comeback. There is no reason now for the US, European or Japanese central banks to keep on pumping tens of billions of dollars,” said Rajeev Thakkar, chief investment officer, PPFAS Mutual Fund.
Foreign institutional investors (FIIs) have intensified their selling in emerging markets this week. Domestic stocks have witnessed sales worth $1.2 billion (Rs 73.8 billion) by FIIs in the last five trading sessions. On Friday, overseas investors sold shares worth Rs 13.5 billion, provisional data showed.
The Sensex has come off 6.3 per cent from its peak of 36,283 touched on January 29. India has relatively outperformed the US, which is down 10 per cent from its peak, and even the Emerging Markets index, which, too, has come off by nearly 10 per cent.
Experts said last month’s levels would not be easy to scale back.
“There is a high chance that we have seen the highs for the year. We may even have seen the highs for the cycle, but that will depend on the resilience of global growth in 2019,” said Jonathan Garner, equity strategist — emerging markets — Morgan Stanley.
The BSE MidCap and SmallCap indices have dropped 8.8 per cent and 11 per cent, respectively, from their peaks reached last month.
After last year’s rally, mid-caps were trading at a significant premium to the benchmarks. The recent fall has narrowed the premium. But experts said mid-caps could tumble more if the correction continued.
Buying by domestic institutional investors (DIIs) have cushioned the fall. Mutual funds (MFs) and other DIIs have bought shares worth Rs 50 billion this week amid the sell-off by FIIs. MFs have been receiving strong flows from investors in the past 12 months. However, the increased turbulence in the market could affect these flows.
The question at this stage was whether domestic inflows into MFs will sustain, given the volatility and the reintroduction of the long-term capital gains tax, Duggad said.