Uncertain times

Market sentiment is notoriously fickle and the mood can swing from euphoria to despair without pausing to take the measure of the fundamentals. Such a change occurred in September. A month ago, valuations were close to all-time highs and investors gleefully predicted a continuing bull run. Now, the same people are talking in terms of a long bear market although the Nifty has corrected by just 7 per cent from the record peak levels. Rising interest rates in developed markets, a falling rupee and a widening current account deficit (CAD) in India have induced foreign portfolio investors (FPIs) to sell Rs 210 billion (debt and equity combined) of Indian assets in September. Many FPIs feel that the currency risk has become unacceptable. There is a high probability that hard currency yields will rise some more as the Federal Reserve continues to hike rates and the European Central Bank gets set to taper off its quantitative easing programme. Some investors are also worried about political instability as the general election of 2019 draws close.

Domestic institutions have also been spooked by the non-bank financial companies (NBFCs) crisis, which was sparked by defaults in IL&FS and fears of a liquidity crunch in debt markets. Strong regulatory action by the Reserve Bank of India against three private banks has also made a dent. Retail investors, who have high levels of exposure to small-caps and mid-caps, have sustained major losses and have started licking their wounds. The darkened mood is indicated by the Infibeam incident. Investors suddenly focused on an adverse report about the e-commerce company's financials, which were first published in April, and sold the stock down 70 per cent in a session. Similar hammering took place in the Dewan Housing Finance counter when news broke that the company's non-convertible debentures had been sold at a discount. Other NBFCs have also seen selling. To be sure, many of these weaknesses — the rupee’s decline, given the increase in crude oil prices or IL&FS defaults, etc. — were known earlier but simply shrugged off. The constitution of a board to credibly work out a rescue of IL&FS could help restore confidence in the bond market and in the NBFC sector, where valuations are looking selectively attractive.

Looking ahead, too many sectors seem plagued by systemic weaknesses. Nowhere is this truer than the Indian banking sector. While public sector banks have been the main culprits, private banks, too, have not covered themselves in glory. Unless this crucial sector recovers its health, it is unlikely that enterprises will prosper. Beyond banking, many other sectors from power to telecom are struggling with viability issues. While it is still early to conclude whether this is the beginning of a new bearish phase or whether this is just another correction, the opinion on the Street is that the Indian markets are staring at uncertain times ahead, with doubts over the earlier projected strong earnings growth for fiscal year 2019. Volatility could therefore continue, given that valuations remain high even after the recent decline, and risks of some moderation in growth in certain segments.