Making Sense Of The Sensex Fall

Since the Union Budget 2019, the Sensex has shed almost 8 per cent and this week alone it has shed about 2.2 per cent. A perfect cocktail of negative news seems to be playing out. In fact, August has begun, where July has left - falling lower. Let's not forget, that it was the worst July in 17 years for the Indian indices. Here are some things to ponder about.

The big ones are crashing

The Sensex has 6-7 big names, which have a high weightage in the index. Typically, TCS, Infosys, HDFC Bank, HDFC, ITC, L&T easily contribute 40 to 50 per cent for the index. If these fall, the markets tend to fall.

What is happening now is that the big guns are falling, dragging the indices lower. The question that arises is: Why are the big guns, particularly the HDFC twins falling?. The simple answer is that both these shares have heavy investment from Foreign Portfolio Investors (FPIs) and when these investors start selling, obviously the first to fall would be them.

Why are FPIs selling?

Earlier in the month of July, when Finance Minister, Nirmala Sitharaman delivered her first budget, she levied a tax on the super rich. Now, many FPIs that are structured as Trusts or AOPs, have to either convert themselves to corporates or end-up paying higher tax. This is one reason that net sold shares in the cash market of nearly Rs 16,870 crores in the month of July and looks like they are on a selling-spree in August as well.

Making sense of the Sensex fall?

So, to sum-up, select FPIs have to pay surcharge on tax and they start to sell stocks, which they heavily own. Since they heavily own the HDFC twins, they are dumping these set of stocks, which have heavy weight on the Sensex, which in turn is leading to a sharp fall.

Other reasons for the crash

a) US Fed sounds less hawkish

The US Federal Reserve cut interest rates by 25 basis points, as was largely expected. However, the tone was less hawkish, casting doubts over future rate cuts. This led to the dollar being firm and a firm dollar is not good news for equities. Indian equities fell in line with Asian markets, though the damage was even more severe in India.

b) A slowdown is looming

Auto numbers have been extremely which has led to a fresh round of selling pressure. Maruti Suzuki reported a drop of 33.5 per cent in sales for the month of July, 2019. Mahindra too reported weak numbers, which saw sales drop 15 per cent, while Escorts too saw a slump of 15 per cent.

Numbers from the auto sector that would be reported in the next few days are also expected to be weakish.

c) Technicals points to extreme weakness

All technical support at this stage seem to be breaking and the markets are likely headed lower. Investors may start nibbling, but, only into quality stocks. Several stocks, including some good quality names are seeing their shares being eroded. Unless, Foreign Portfolio Investors stop selling into stocks, the market slide is most likely to continue.

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