Stock market crash: In May, FPI selling in the cash market has been relentless. FPIs have been sellers on every trading day and have sold equity for ₹24,975 crores. This has contributed to the underperformance of the Indian market. DIIs have been buying, but HNI and retail investors appear to be in a wait-and-watch mode due to new developments on the political front.
The lower turnout in the first three phases of elections has led to debates on its impact on the fortunes of the ruling dispensation and the Opposition alliance. There are claims and counterclaims. The fact is that nobody knows the likely impact. Electioneering and speeches by the leading leaders have become more intense and shriller. Some political pundits are of the view that the certainty surrounding the election results, which was very high when the elections began, has declined now. Since the market had largely discounted an NDA/BJP victory, the new development is causing some jitters contributing to the market weakness.
Why the Stock Market Crash?
It is important to understand that sustained FII selling has nothing to do with uncertainty relating to the election results. It has more to do with the relative valuations of stock markets and the sharp differences in recent market performance. During the one-month period from April 11th to May 11th the Indian stock market underperformed. While the S&P 500 and Stoxx 50 appreciated by 1.04 percent and 1.07 percent during this period, Nifty fell by 2.06 percent. Significant outperformance was registered by Shanghai Composite and Hang Seng indexes: Shanghai composite appreciated by 3.96 percent while Hang Seng spiked by 10.93 percent during this period. These major variations in performances are being caused by many factors, economic and non-economic. Getting a correct perspective of these developments will help in formulating appropriate investment strategies.
The China effect on Stock market crash
China’s serious economic issues have been impacting their stock markets for a long time. Now there is a global consensus that China’s growth will be very low, below 4 percent, for many years to come. Crisis in the real estate market which accounts for around 24 percent of the Chinese GDP has been plaguing the economy for long. Declining population is another major long-term negative. The Chinese government’s policy of putting restrictions on many Chinese companies has impacted their corporate sector and its profitability.
Consequently, the Chinese stock market had hugely underperformed other markets for many years. The Shanghai Composite is even now 45 percent down from its 2007 peak and Hang Seng is down 38 percent from the 2007 peak. Such a long period of underperformance has disappointed foreign investors who fled China impacting their markets further.
There are restrictions on foreign investors investing in Chinese shares (A shares) listed in the Shanghai Exchange. Foreigners invest in Chinese shares (H shares) listed in Hang Seng. Long period of underperformance and foreign investor disillusionment led to a crash in Chinese valuations. The PE of Shanghai composite dipped below 10, and the PE of Hang Seng fell below 9 making valuations very cheap.
Last one month has witnessed a reversal of this long-term trend. As mentioned earlier the Shanghai and Hang Seng markets are outperforming and this has brought investors back to Chinese shares. FIIs have been selling in expensive emerging markets like India and buying cheap Chinese stocks. The important question is: how long will this new trend last?
Conclusion
Even now, the base case scenario is political stability in India. Therefore, as clarity emerges on the political front, the market is likely to bounce back. DII, HNI and retail buying has the potential to effectively counter FII selling forcing a turnaround in the market. Therefore, investors can exploit the weakness in the market to accumulate high quality large caps which are fairly valued now.
The author is VK Vijayakumar, Chief Investment Strategist, Geojit Financial Services.
Disclaimer: The views and recommendations provided in this analysis are those of individual analysts or broking companies, and not Mint. We strongly advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and individual circumstances may vary.
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Published: 13 May 2024, 05:23 PM IST