Stock markets across the globe will not be celebrating Valentine’s Day. World over, markets have slumped. The crash in the local market can be attributed to a global rout as well as some domestic concerns.
Here are five things investors in the Indian stock market should note.
Yesterday, the rupee plummeted 45 paise to end at an over 29-month low of 68.30 to the dollar. In fact it fell to 68.34 before finishing at 68.30. Readers may recall that the rupee had slumped to its all-time closing low of 68.80 a dollar on August 28, 2013.
The current slump can be attributed to the demand for the USD in the face of foreign capital outflows. According to a report in Business Standard, Foreign Institutional Investors (FIIs)'s shareholding in Indian companies dropped to its lowest level in nearly three years at the end of the December quarter. The report stated that FII shareholding is expected to come off sharply in the ongoing quarter, given the sharp sell-off (FIIs have already pulled out over $2 billion from stocks this quarter).
The quarterly results of banks have been disappointing. Central Bank of India, Dena Bank and Allahabad Bank reported losses while Punjab National Bank and ICICI Bank saw profits slide. And reports of high non-performing assets, or NPAs, has made investors nervous.
Asset Quality Review, or AQR, was started by the central bank in April 2015 when RBI Governor Raghuram Rajan trained his guns on the banking system with the aim of purging it of bad loans by March 2017. This entails loan classification accompanied by provisioning (which ensures the bank sets aside a buffer to absorb likely losses). Higher provisions associated with increase in bad loans pushes down net income. Under the current norms, banks need to set aside money (provisioning) against possible future losses and existing non-performing loans.
Now the RBI has directed commercial banks to accelerate provisioning requirement, from April 1, for the existing stock of restructured loans that are showing signs of stress.
Yesterday, U.S. crude futures dropped to settle at $26.21, the lowest point since 2003 and a sharp drop from it 2014 peak of almost $108. Low crude prices cause energy companies' profits to plunge and raise worries about of bankruptcies in the oil sector. This, in turn, drags down energy company shares in the S&P 500 index which pulls the overall index down.
It is a classic case of supply being greater than demand as investors fret about global growth. Julian Jessop, head of commodities research with London-based researchers Capital Economics, was quoted in The Guardian saying that it seems “ironic that in the run-up to the global financial crisis we were worried about oil prices being too high in 2007 and 2008. Now we’re worried about them being too low.”
The MSCI all-country world equity index, which tracks equity shares in 45 countries, hit its lowest level in more than two and a half years. It closed at 353.35, from an all-time closing high of 442.70 in May last year.
According to BBC’s economics editor Kamal Ahmed, the sell-off is a mix - part economic fundamentals, part market emotion as herding investors follow each other down a negative spiral, and part brute market forces, the major trading houses looking to make a profitable turn on share prices which they bet are not going up any time soon.
He explains that the three engines of global growth have some worrying rattles.
In the U.S., Janet Yellen, chairwoman of the Federal Reserve, America's central bank, said that the global economy was "less supportive" of U.S. growth, adding to the feeling that 2016 will be a year dominated by market bears. (Nitin Dialdas, CIO at Hong Kong-based Mandarin Capital told Reuters 2016 would be tough: I think this is going to be a difficult year for investors and even a fledgling U.S. economic recovery looks to be snuffed out by global markets development.)
In China, economic concerns have been spiced by increasing market and currency volatility.
The Eurozone is not totally out of the financial crisis sick ward and industrial production in the three major economies - Germany, Italy and France - is down.
- Losing faith in central banks
Central bank policies and the uncertainty around their effectiveness is a big concern.
Steen Jakobsen, chief economist at Saxo Bank, said in a note that the week may go down in financial history as the week when central bank planning died, and sees central banks now as totally impotent.
Yellen stated recently that negative interest rates were “not off the table”. Which surprised investors who assumed that the Fed would raise borrowing costs slowly this year after moving for the first time in December in almost a decade.
Kit Juckes, global macro strategist at Société Générale, explained it succinctly in a note. “We have relied on central bankers to fix the world’s economic woes, when all they could really do was to get the global financial system back on an even keel. Keeping policy too easy, for too long and boosting asset markets in the vain hope that this would deliver a sustainable pickup in demand has meant that even a timid attempt at normalizing Fed policy has caused two months of mayhem.”
He concluded that amidst a growing realization that central banks’ powers are on the wane, investors are rushing for other havens.
