Why are markets spooked and why they shouldn’t be!

Share Markets have slumped once again with the Sensex losing over 1400 points in just 4 trading sessions. Some real and some not so real issues are spooking investors, more the result of irrational exuberance over the last 2-3 months.

  • From the recent high of 29,850 in end-January, the Sensex has slumped nearly 8%. In the short span since the start of 2015, investors have seen stomach churning swings in the Sensex:
  • From 27,500 at beginning of the year to nearly 29,850 by the end of January (over 8.5% jump)  only to reach 28,044 on 10 February (6% fall in 10 days); and

From 27,250 at end of March to 29,100 on 15 April (7% jump in about 18 days) only to reach a low of 27,687 as on 21 April (5% fall in 6 days).

Does market spooking really works in online trading? Should it be done or not?

Some of the reasons offered for the nervousness with their logical counter-arguments are:

Factor Counter
The US Fed will hike interest rates soon, leading to a) slowdown in the US; and b) reversal of capital flows back into the US This factor is now so well priced in through excellent expectation management by the Fed that the mere possibility cannot be a market swinger in itself. Besides, latest US economic indicators are vague enough to cause the Fed to pause on rate hikes
Government’s inability to push through reforms in its first year and unmet market expectations Again, this has been an ongoing issue with the opposition stalling proceedings in the Rajya Sabha. Realistically, this Government was never going to be able to push through reforms at a blazing pace, more so with the fiscal constraints India faces
Possibility of Grexit and continued turmoil in Europe Negotiations between the EU and the new Greek Government have led to a solution that has effectively kicked the can down the road. Besides this, growth indicators in peripheral and large economies are stronger than the last time around
Geo-political turmoil in the Middle East (Yemen, Syria) The action in Yemen has turned out to be a very localized one with no impact on either oil supplies or on stability in the wider region
FPIs selling out on equities as risk-off gathers steam Per SEBI data, FPIs have bought an average of Rs12,000crs of equities (net) every month from January to March and ~Rs2,300crs MTD in April. This comes on top of the ~Rs600crs (net) of equities that DIIs have purchased this month.
MAT levy on FPIs, which will dampen their investment appetite and allocations to India The proposed retrospective MAT levy of ~Rs40,000crs is on transactions up to March 2015. The FM has already clarified that there will be no MAT levy on transactions from April 2015 hence there is no question of this issue impacting prospective investments. Also, MAT applies only to FPIs registered as corporates and does not apply to the hugely popular P-note route

 

So why the sell-off?

For once, the reason has to do with pure fundamentals. The primary reason for the correction is the disappointment over quarterly results. A glance at the timing of the swings makes it obvious that share markets had run up way too much in both beginning of January and April over sky high expectations from Q3 and Q4 results, respectively. Soon as early results started trickling in from mid-Jan and mid-April, prices started correcting. The genesis of the expectations was in the oil price crash between October and December 2014 that had led investors to expect that savings will start reflecting in results immediately. This fallacious expectation disregarded core aspects such as advance orders for raw materials (at older prices), inventory levels, hedged positions, etc., all of which combine to temper the gains from falling oil prices.

The rolling quarterly price swings will end only once the unreal expectations over financial results abate – as things stand, with no other fundamental triggers on hand, this does not seem very likely.

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