The Sensex shed as much as 1,545 points in trade today, with the Nifty declining as much as 468 points. We have not seen such a dramatic fall in the markets for sometime now. There was selling pressure and of course, the big selling pressure was from Foreign Portfolio Investors.
The big reason for the market fall
Global cues were not bad at all. In fact, Dow Futures were trending higher and the European markets were almost little changed. What is spooking our markets is the huge selling pressure from Foreign Portfolio Investors. One of the reasons for the near three per cent knock in the markets today was worries over rising interest rates in the US. The US Federal Reserve, which decides on interest rates is expected to hike interest rates at least 4 times this year to curb inflation.
Now, these are just expectations and we are not sure, how many times the US Fed would hike interest rates. But, the worries on US inflation are real and to curb inflation rates, interest rates must rise.
What has rising interest rates in the US got to do with the Indian markets?
When interest rates rise in the US, there is outflows from emerging market stocks by Foreign Portfolio Investors. These set of investors start chasing high sovereign bond yields in the US, which are safe. The stock markets were in a sweet spot in the last many years. Interest rates were low,, which pushed investors to invest in stocks. With interest rates now likely to rise and the Fed also hinting at shrinking its balance sheet, emerging market stocks are likely to come in for a pounding.
Indian markets are in any case expensive
Indian markets are one of the most expensive stock markets in the world. The Nifty is trading at 21 to 22 times one year forward price to earnings multiple, which is at a huge premium to long term averages. So clearly, it has to fall, purely on the basis of valuations. However, liquidity flowing into mutual fund has so far managed to keep the markets from falling. However, if there is aggressive selling by Foreign Portfolio Investors of a few billion dollars, we may see the markets tanking even further.
So, the best strategy right now would be to nibble into stocks and avoid investing huge lumpsums. We do not know as yet when FPI selling would actually stop.