Why Markets are falling? 

NIFTY is down more 7.5% since 4th July. But, Why? The government is back with greater than expected majority thus representing a stable political situation moreover this government has set an audacious target of becoming a 5 trillion economy in 5 years from now. The fiscal deficit target of 3.3% of GDP is prudent, crude oil prices have fallen to 64$ per barrel, a fall of more than 15% from its previous high in May 19, the rupee is also stable. Last week, IMF reduced the GDP forecast by 0.3%, but even after reduction Indian economy, according to the IMF, is poised to grow at 7% making it the fastest-growing large economy in the world. Globally liquidity is cheaply available with fed reducing rates yet Indian markets are falling, But Why? 

Because Global economic growth is weak

Global economic conditions have drastically changed since the start of 2019. In June 19, The World bank reduced projected GDP to 2.6% from 3% at the start of the year. The reduction has been attributed to the trade conflict between the US and China, the two countries account for a third of global economic activity. In July 19, Morgan Stanley downgraded global equity on account of weaker growth, trade tension, softening PMI data and diminished inflation expectation. So perhaps Indian markets are correcting due to global reasons, perhaps not! In the ranking of top 50 equity markets, in terms of performance year to date, India is ranked at 43^rd! 

Because FPIs are Selling post introduction of draconian “Surcharge”

India received 8 Billion dollars from Jan’19 till June’19 and witnessed an outflow of 3 Billion dollars in the month of July. More specifically selling began after 4th July, The outflow is attributed to the introduction of surcharge which increased the long term capital gain tax of FPI (foreign portfolio investors) to 14.2% from 11.9% and short term to 21.4% from 17.9%. The increase in tax is clearly steep and asset managers who run these funds have something in common with you and me, we like lower taxes!

But, the current fall in the market is enough to make up for the incremental tax, yet we see daily outflow, is there another reason for the fall?

Because Indian corporates are bleeding

The most important reason has been lack of earnings. There has been total collapse of earnings of India Inc. The compounded earnings growth in the last 8 years has been just 5%! Back in 2008, the ratio of corporate profit / GDP was 7%, today it is just over 2%. Auto sales (both passenger cars and two-wheelers) are down, MSME sector has been struggling post GST, Investment cycle remains weak, rural wage growth is at 6 years low, corporate banks are struggling to grow due to NPA clean up, NBFCs are struggling to survive, telecom sector is searching for a new business model, pharmaceuticals is at 5 years low, HFC (housing finance companies) are sinking in the already drowning Real estate sector, IBC regime needs to be improved for quicker results Et al. 

What’s funny about Equity Markets?

Amidst all the chaos markets are resilient, actually NIFTY has slightly grown since the start of 2019! Globally there is an increase in liquidity and cheap money - US Fed is cutting rates, EU is providing stimulus to the economy, the interest rates in Japan, Swiss, Germany and France are -0.22%, -0.9%, -0.75% and -0.68% respectively. That’s just the global liquidity, The Indian retail investors, ditched by real estate, smitten by equity, have lately emerged to be the elephant in the room, the SIP flows are unflinchingly robust at upwards of 8,000 Cr a month. To sum up, the Market is weak yet stubbornly resilient.