Why India is the only stock market reacting to bad news globally

Indian markets seem to have reacted to a China downgrade by S&P, a UK downgrade by Moody’s, and a once-in-a-generation change in the US already named as the ‘Great Unwinding’.

Shishir Asthana

Moneycontrol Research

Is Indian market the only one concerned about global developments while all other emerging markets are ignorant? Indian markets seem to have reacted to a China downgrade by S&P, a UK downgrade by Moody’s, and a once-in-a-generation change in the US already named as the ‘Great Unwinding’.

Foreign investors seem to be selling their holding in the Indian stock markets while increasing it in other emerging markets, especially in other member countries of BRICS (Brazil, Russia, China and South Africa). Apart from India, all other markets continue to remain strong.

China equity funds extended their longest inflow streak since the third quarter of 2014 while Brazil equity funds hit a 17-week high on continued inflows. A rally in commodities is helping a sustained rally in Brazil. Chinese markets were higher despite the country being downgraded.

Overall emerging market funds posted inflows of USD 2.7 billion during the week ending September 20, 2017. In the last 38 weeks emerging markets have seen inflows in 34 weeks.

In India, however, the story seems to be different. Since the beginning of August 2017, foreign investors have withdrawn nearly Rs 20,000 crore as on September 25, 2017. Debt markets, though, continued to see inflows during this time period.

The only reason market has shown some respectability is on account of buying by domestic mutual players who have bought nearly Rs 25,000 crore of shares. However, this is not enough to stop the general market slide.

Why is it that foreigners are selling and domestic institutions are buying?

One reason that has been attributed to funding managers is that foreign institutions have a choice of investing in various markets and are using this to buy into cheaper markets. Indian markets trade at price-to-earnings ratio of 24 while Brazil trades at 17 times, China at 15 times, South Africa at 15 times and Russia at 7 times.

Clearly, Indian markets are costly, but they have been costly for some time now. What was the trigger for foreigners to sell at the beginning of August 2017?

By end of July, the disruption caused by the implementation of Goods and Service Tax (GST) was becoming clear. Many industries were reporting a near clampdown in activity even after inventory de-stocking. Inventory build-up that was expected in the industry would have to wait as the process would take more time on account of lack of operational clarity.

GST disruption meant that the government would not be able to meet its GDP guidance.

Further, by July, various state governments were announcing loan waivers to the farmers. Though it would not directly impact the fiscal math, state governments who were driving growth would have to slow down.

In short, Indian economy was not expected to go anywhere. Corporate India’s profit as a percentage of GDP had halved in the last few years and it would take some more years to recover. Government incentives or a stimulus package, if and when it is announced, will take more time to show up on companies P&L. There was no reason for these fund managers to stay in India especially since Brazil and South Africa were showing promise on account of better commodity prices, China was expected to see an election-related stimulus and Russia was gaining for higher oil prices.

So, if Indian markets are not looking good why are domestic funds buying? One reason is they do not have the same option as a foreign fund manager. An Indian fund will have to invest in Indian markets. Though they can prefer to stay in cash, according to reports, cash levels in funds are already high. The record inflow through systematic investment plans is compelling fund managers to buy in stocks where valuations are still attractive.

Secondly, Indian funds do not mind staying invested in mid-cap and small cap stocks. The current fall has given them an opportunity to nibble at their favourite counters.

North Korea News LIVE: Vladimir Putin terms new sanctions on N Korea “useless”

South Korean Defense Ministry handout: South Korean Vessels taking part in a naval drill off the east coast on September 4, 2017.

South Korea’s National Intelligence Service (NIS) has said that North Korea is believed to be moving an ICBM. It said that the missile’s projectile and how it was being transported was unclear.

British Conservative politician William Hague said that Kim Jong-un is probably a prisoner of his own dictatorship. “Born the third son of Kim Jong-il, he has always faced a choice of getting absolute power for himself or facing the dire consequences of not doing so,” Hague wrote in the Telegraph, adding that were Kim to dismantle the brutal North Korean regime, or even relax his grip on power, he could easily be assassinated.

Russian President Putin also warned that the escalating North Korean crisis could cause a “planetary catastrophe” and huge loss of life.

“The world is stunned by news that the DPRK’s intermediate-and-long range strategic ballistic rocket Hwasong-12 crossed the sky over islands of Japan along the preset flight track and accurately hit the preset target waters in northern Pacific.
The U.S. and Japan, the sworn enemies of the Korean nation, are struck with horror in face of the mettle of the DPRK which took the toughest counteraction against the U.S. insensible war drills. In the meantime, the Korean people feel relieved, their towering grudge settled,” KCNA had reported on Monday.

Russian President Vladimir Putin has said that new sanctions imposed on North Korea would be “useless” and “ineffective”, adding that imposing tougher sanctions on the regime of Kim Jong Un over its nuclear missile programme would not change the leadership in Pyongyang, but could lead to large-scale human suffering.

In an article published in KCNA, the state-owned news agency in North Korea, Kim Myong Gil, an officer of the Korean People’s Army, said:

“Another thrilling nuclear thunder of Songun Korea is heavy punishment and sledgehammer blows to the US imperialists who are bringing the worst touch-and-go situation on the Korean peninsula while being carried away by ill-advised bravery.

Neglecting the strategic position of our country as a Juche-oriented nuclear power and a military power, they are bent on brigandish sanctions and stifling manoeuvres and hysteric war exercises. Today’s triumph deals another heavy blow to them, but fills us service personnel with the inexhaustible might and courage.”